CONGRESSIONAL OVERSIGHT PANEL 

NOVEMBER OVERSIGHT REPORT * 

EXAMINING THE CONSEQUENCES OF 

MORTGAGE IRREGULARITIES FOR FINANCIAL STABILITY AND FORECLOSURE MITIGATION 

NOVEMBER 16, 2010.—Ordered to be printed 

* Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic 

Stabilization Act of 2008, Pub. L. No. 110–343 


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CONGRESSIONAL OVERSIGHT PANEL NOVEMBER OVERSIGHT REPORT 


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1 

61–835 2010

CONGRESSIONAL OVERSIGHT PANEL 

NOVEMBER OVERSIGHT REPORT * 

EXAMINING THE CONSEQUENCES OF 

MORTGAGE IRREGULARITIES FOR FINANCIAL STABILITY AND FORECLOSURE MITIGATION 

NOVEMBER 16, 2010.—Ordered to be printed 

* Submitted under Section 125(b)(1) of Title 1 of the Emergency Economic 

Stabilization Act of 2008, Pub. L. No. 110–343 


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(II) 

CONGRESSIONAL OVERSIGHT PANEL 

PANEL MEMBERS

SEN. TED KAUFMAN, Chairman 

RICHARD H. NEIMAN

DAMON SILVERS

J. MARK MCWATTERS

KENNETH TROSKE


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(III) 

C O N T E N T S 

Page 

Executive Summary ................................................................................................. 1 

Section One: 

A. Overview ....................................................................................................... 4 

B. Background .................................................................................................. 5 

C. Timeline ........................................................................................................ 6 

D. Legal Consequences of Document Irregularities ....................................... 10 

1. Potential Flaws in the Recording and Transfer of Mortgages and 

Violations of Pooling and Servicing Agreements ................................. 12 

2. Possible Legal Consequences of the Document Irregularities to 

Various Parties ...................................................................................... 19 

3. Additional Considerations .................................................................... 27 

E. Court Cases and Litigation ......................................................................... 28 

1. Fraud Claims ......................................................................................... 29 

2. Existing and Pending Claims under Various Fraud Theories .......... 33 

3. Other Potential Claims ......................................................................... 35 

4. Other State Legal Steps ....................................................................... 36 

5. Other Possible Implications: Potential ‘‘Front-end’’ Fraud and Documentation Irregularities ...................................................................... 38 

F. Assessing the Potential Impact on Bank Balance Sheets ........................ 42 

1. Introduction ........................................................................................... 42 

2. Foreclosure Irregularities: Estimating the Cost to Banks ................. 48 

3. Securitization Issues and Mortgage Put-backs ................................... 52 

G. Effect of Irregularities and Foreclosure Freezes on Housing Market ..... 59 

1. Foreclosure Freezes and their Effect on Housing ............................... 59 

2. Foreclosure Irregularities and the Crisis of Confidence .................... 64 

H. Impact on HAMP ......................................................................................... 65 

I. Conclusion ..................................................................................................... 68 

Section Two: Correspondence with Treasury ........................................................ 71 

Section Three: TARP Updates Since Last Report ................................................. 72 

Section Four: Oversight Activities .......................................................................... 96 

Section Five: About the Congressional Oversight Panel ...................................... 97 

Appendices: 

APPENDIX I: LETTER FROM CHAIRMAN TED KAUFMAN TO SPECIAL MASTER PATRICIA GEOGHEGAN, RE: FOLLOW UP TO EXECUTIVE COMPENSATION HEARING, DATED NOVEMBER 1, 

2010 ................................................................................................................ 98 


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* The Panel adopted this report with a 5–0 vote on November 15, 2010. 

NOVEMBER OVERSIGHT REPORT 

NOVEMBER 16, 2010.—Ordered to be printed 

EXECUTIVE SUMMARY * 

In the fall of 2010, reports began to surface alleging that compa- nies servicing $6.4 trillion in American mortgages may have bypassed legally required steps to foreclose on a home. Employees or 

contractors of Bank of America, GMAC Mortgage, and other major 

loan servicers testified that they signed, and in some cases 

backdated, thousands of documents claiming personal knowledge of 

facts about mortgages that they did not actually know to be true. 

Allegations of ‘‘robo-signing’’ are deeply disturbing and have 

given rise to ongoing federal and state investigations. At this point 

the ultimate implications remain unclear. It is possible, however, 

that ‘‘robo-signing’’ may have concealed much deeper problems in 

the mortgage market that could potentially threaten financial stability and undermine the government’s efforts to mitigate the foreclosure crisis. Although it is not yet possible to determine whether 

such threats will materialize, the Panel urges Treasury and bank 

regulators to take immediate steps to understand and prepare for 

the potential risks. 

In the best-case scenario, concerns about mortgage documentation irregularities may prove overblown. In this view, which has 

been embraced by the financial industry, a handful of employees 

failed to follow procedures in signing foreclosure-related affidavits, 

but the facts underlying the affidavits are demonstrably accurate. 

Foreclosures could proceed as soon as the invalid affidavits are replaced with properly executed paperwork. 

The worst-case scenario is considerably grimmer. In this view, 

which has been articulated by academics and homeowner advocates, the ‘‘robo-signing’’ of affidavits served to cover up the fact 


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that loan servicers cannot demonstrate the facts required to conduct a lawful foreclosure. In essence, banks may be unable to prove 

that they own the mortgage loans they claim to own. 

The risk stems from the possibility that the rapid growth of 

mortgage securitization outpaced the ability of the legal and financial system to track mortgage loan ownership. In earlier years, 

under the traditional mortgage model, a homeowner borrowed 

money from a single bank and then paid back the same bank. In 

the rare instances when a bank transferred its rights, the sale was 

recorded by hand in the borrower’s county property office. Thus, 

the ownership of any individual mortgage could be easily demonstrated. 

Nowadays, a single mortgage loan may be sold dozens of times 

between various banks across the country. In the view of some 

market participants, the sheer speed of the modern mortgage market has rendered obsolete the traditional ink-and-paper recordation 

process, so the financial industry developed an electronic transfer 

process that bypasses county property offices. This electronic process has, however, faced legal challenges that could, in an extreme 

scenario, call into question the validity of 33 million mortgage 

loans. 

Further, the financial industry now commonly bundles the rights 

to thousands of individual loans into a mortgage-backed security 

(MBS). The securitization process is complicated and requires several properly executed transfers. If at any point the required legal 

steps are not followed to the letter, then the ownership of the mortgage loan could fall into question. Homeowner advocates have alleged that frequent ‘‘robo-signing’’ of ownership affidavits may have 

concealed extensive industry failures to document mortgage loan 

transfers properly. 

If documentation problems prove to be pervasive and, more importantly, throw into doubt the ownership of not only foreclosed 

properties but also pooled mortgages, the consequences could be severe. Clear and uncontested property rights are the foundation of 

the housing market. If these rights fall into question, that foundation could collapse. Borrowers may be unable to determine whether 

they are sending their monthly payments to the right people. 

Judges may block any effort to foreclose, even in cases where borrowers have failed to make regular payments. Multiple banks may 

attempt to foreclose upon the same property. Borrowers who have 

already suffered foreclosure may seek to regain title to their homes 

and force any new owners to move out. Would-be buyers and sellers 

could find themselves in limbo, unable to know with any certainty 

whether they can safely buy or sell a home. If such problems were 

to arise on a large scale, the housing market could experience even 

greater disruptions than have already occurred, resulting in significant harm to major financial institutions. For example, if a Wall 

Street bank were to discover that, due to shoddily executed paperwork, it still owns millions of defaulted mortgages that it thought 

it sold off years ago, it could face billions of dollars in unexpected 

losses. 

Documentation irregularities could also have major effects on 

Treasury’s main foreclosure prevention effort, the Home Affordable 

Modification Program (HAMP). Some servicers dealing with Treasury may have no legal right to initiate foreclosures, which may call 


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into question their ability to grant modifications or to demand payments from homeowners. The servicers’ use of ‘‘robo-signing’’ may 

also have affected determinations about individual loans; servicers 

may have been more willing to foreclose if they were not bearing 

the full costs of a properly executed foreclosure. Treasury has so far 

not provided reports of any investigation as to whether documentation problems could undermine HAMP. It should engage in active 

efforts to monitor the impact of foreclosure irregularities, and it 

should report its findings to Congress and the public. 

In addition to documentation concerns, another problem has arisen with securitized mortgage loans that could also threaten financial stability. Investors in mortgage-backed securities typically demanded certain assurances about the quality of the loans they purchased: for instance, that the borrowers had certain minimum credit ratings and income, or that their homes had appraised for at 

least a minimum value. Allegations have surfaced that banks may 

have misrepresented the quality of many loans sold for 

securitization. Banks found to have provided misrepresentations 

could be required to repurchase any affected mortgages. Because 

millions of these mortgages are in default or foreclosure, the result 

could be extensive capital losses if such repurchase risk is not adequately reserved. 

To put in perspective the potential problem, one investor action 

alone could seek to force Bank of America to repurchase and absorb 

partial losses on up to $47 billion in troubled loans due to alleged 

misrepresentations of loan quality. Bank of America currently has 

$230 billion in shareholders’ equity, so if several similar-sized actions—whether motivated by concerns about underwriting or loan 

ownership—were to succeed, the company could suffer disabling 

damage to its regulatory capital. It is possible that widespread 

challenges along these lines could pose risks to the very financial 

stability that the Troubled Asset Relief Program was designed to 

protect. Treasury has claimed that based on evidence to date, mortgage-related problems currently pose no danger to the financial 

system, but in light of the extensive uncertainties in the market 

today, Treasury’s assertions appear premature. Treasury should explain why it sees no danger. Bank regulators should also conduct 

new stress tests on Wall Street banks to measure their ability to 

deal with a potential crisis. 

The Panel emphasizes that mortgage lenders and securitization 

servicers should not undertake to foreclose on any homeowner unless they are able to do so in full compliance with applicable laws 

and their contractual agreements with the homeowner. 

The American financial system is in a precarious place. Treasury’s authority to support the financial system through the Troubled Asset Relief Program has expired, and the resolution authority 

created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 remains untested. The 2009 stress tests that 

evaluated the health of the financial system looked only to the end 

of 2010, providing little assurance that banks could withstand 

sharp losses in the years to come. The housing market and the 

broader economy remain troubled and thus vulnerable to future 

shocks. In short, even as the government’s response to the financial 

crisis is drawing to a close, severe threats remain that have the potential to damage financial stability. 


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SECTION ONE: 

A. Overview 

In the fall of 2010, with the Troubled Asset Relief Program’s 

(TARP) authority expiring, reports began to surface of problems 

with foreclosure documentation, particularly in states where foreclosures happen through the courts. GMAC Mortgage, a subsidiary 

of current TARP recipient Ally Financial, announced on September 

24, 2010 that it had identified irregularities in its foreclosure document procedures that raised questions about the validity of foreclosures on mortgages that it serviced. Similar revelations soon followed from Bank of America, a former TARP recipient, and others. 

Employees of these companies or their contractors have testified 

that they signed, and in some cases backdated, thousands of documents attesting to personal knowledge of facts about the mortgage 

and the property that they did not actually know to be true. Mortgage servicers also appeared to be cutting corners in other ways. 

According to these banks, their employees were having trouble 

keeping up with the crush of foreclosures, but additional training 

and employees would generally suffice to get the process in order 

again. 

At present, the reach of these irregularities is unknown. The 

irregularities may be limited to paperwork errors among certain 

servicers in certain states; alternatively, they may call into question aspects of the securitization process that pooled and sold interests in innumerable mortgages during the housing boom. Depending on their extent, the irregularities may affect both Treasury’s 

ongoing foreclosure programs and the financial stability that Treasury, under the Emergency Economic Stabilization Act of 2008 

(EESA), was tasked with restoring. Further, the mortgage market 

faces ongoing risks related to the right of mortgage-backed securities to force banks to repurchase any loans. Losses stemming from 

these repurchases would compound any risks associated with documentation irregularities. 

Under EESA, the Congressional Oversight Panel is charged with 

reviewing the current state of the financial markets and the regulatory system. The Panel’s oversight interest in foreclosure documentation irregularities stems from several distinct concerns: 

If Severe Disruptions in the Housing Market Materialize, Financial Stability and Taxpayer Funds Could Be Imperiled. 

If document irregularities prove to be pervasive and, more importantly, throw into question ownership of not only foreclosed properties but also pooled mortgages, the result could be significant 

harm to financial stability—the very stability that the TARP was 

designed to protect. In the worst case scenario, a clear chain of 

title—an essential element of a functioning housing market—may 

be difficult to establish for properties subject to mortgage loans 

that were pooled and securitized. Rating agencies are already cautious in their outlook for the banking sector, and further blows 

could have a significant effect. The implications could also be dire 

for taxpayers’ recovery of their TARP investments. Treasury still 

has $66.8 billion invested in the banking sector generally, and as 

the Panel discussed in its July report, ‘‘Small Banks in the Capital 


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1Taxpayers may also be at risk for losses related to Treasury’s investment in AIG. The Maiden Lane II and Maiden Lane III vehicles, which the Federal Reserve Bank of New York 

(FRBNY) created to hold assets purchased from AIG, hold substantial amounts of residential 

mortgage-backed securities (RMBSs), most of which are either sub-prime or Alt-A mortgages 

originated during the housing boom. Treasury’s ability to recover the funds it has put into AIG 

depends in significant part on FRBNY’s ability to collect on these investments, and uncertainty 

associated with the investments could hinder that process. 

Purchase Program,’’ the prospects for repayment from smaller 

banks are still uncertain and dependent, in great part, on a sector 

healthy enough to attract private investment.1

HAMP May Rely on Uncertain Legal Authority and Inaccurate Foreclosure Cost Estimates, Potentially Posing a 

Risk to Foreclosure Mitigation Efforts. If irregularities in the 

foreclosure process reflect deeper failures to document properly 

changes of ownership as mortgage loans were securitized, then it 

is possible that Treasury is dealing with the wrong parties in the 

course of the Home Affordable Modification Program (HAMP). This 

could mean that borrowers either received or were denied modifications improperly. Some servicers dealing with Treasury may have 

no legal right to initiate foreclosures, which may call into question 

their ability to grant modifications or to demand payments from 

homeowners, whether they are part of a foreclosure mitigation program or otherwise. The servicers’ tendency to cut corners may also 

have affected the determination to modify or foreclose upon individual loans. Because the net present value (NPV) model compares 

the net present value of the modification to a foreclosure, improper 

procedures that cut corners might have affected the foreclosure cost 

calculation and thus might have affected the outcome of the NPV 

test. 

TARP-Recipient Banks May Have Failed to Meet Legal Obligations. Many of the entities implicated in the recent document 

irregularities, including Ally Financial, Bank of America, and 

JPMorgan Chase, are current or former TARP recipients. Ally Financial, notably, remains in TARP and is in possession of $17.2 billion in taxpayer funds. Bank of America received funds not only 

from TARP’s Capital Purchase Program (CPP) but also what Treasury deemed ‘‘exceptional assistance’’ from TARP’s Targeted Investment Program (TIP). Some of the banks involved were also subject 

to the Supervisory Capital Assessment Program (SCAP), also 

known as the stress tests: Treasury’s and the Board of Governors 

of the Federal Reserve’s (Federal Reserve) efforts to determine the 

health of the largest banks under a variety of stressed scenarios. 

The Congressional Oversight Panel will continue to monitor 

Treasury’s engagement with these ongoing events, not only to protect the taxpayers’ existing TARP investments and to oversee its 

foreclosure mitigation programs, but also to meet the Panel’s statutory mandate to ‘‘review the current state of the financial markets 

and the regulatory system.’’ 

B. Background 

In the fall of 2010, a series of revelations about foreclosure documentation irregularities hit the housing markets. The transfer of a 

property’s title from the mortgagor (the homeowner) to the mortgagee (typically a bank or a trust) necessary for a successful foreVerDate Mar 15 2010 02:17 Dec 02, 2010 Jkt 061835 PO 00000 Frm 00011 Fmt 6602 Sfmt 6602 E:\HR\OC\A835.XXX A835

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2These steps depend on whether a state is a judicial foreclosure state or a non-judicial foreclosure state, as further described below, in footnote 17. 3 If mortgage documentation has errors or misrepresentations, buyers of the mortgage paper 

can ‘‘put-back’’ the mortgage to its originator and require them to repurchase the mortgage. For 

a more complete discussion of this possibility, see Sections D.1.b and D.2. 

Several analysts and experts have speculated on the potential for widespread impact. Morgan 

Stanley, Housing Market Insights: Washington, We Have a Problem (Oct. 12, 2010); Amherst 

Mortgage Insight, The Affidavit Fiasco—Implications for Investors in Private Label Securities 

(Oct. 12, 2010); FBR Capital Markets, Conference Call: Foreclosure Mania: Big Deal or Not? 

(Oct. 15, 2010) (hereinafter ‘‘FBR Foreclosure Mania Conference Call’’). In a conference call with 

investors, Jamie Dimon, CEO of JPMorgan Chase, speculated that the issue could either be a 

‘‘blip’’ or a more extended problem with ‘‘a lot of consequences, most of which will be adverse 

on everybody.’’ Cardiff Garcia, JPM on Foreclosures, MERS, Financial Times Alphaville Blog 

(Oct. 13, 2010) (online at ftalphaville.ft.com/blog/2010/10/13/369406/jpm-on-foreclosures-mers/) 

(hereinafter ‘‘JPM on Foreclosures, MERS’’) (‘‘If you talk about three or four weeks it will be 

a blip in the housing market. If it went on for a long period of time, it will have a lot of consequences, most of which will be adverse on everybody.’’). 

closure requires a series of steps established by state law.2 As further described below, depositions taken in a variety of cases in 

which homeowners were fighting foreclosure actions indicated that 

mortgage servicer employees—who were required to have personal 

knowledge of the matters to which they were attesting in their affidavits—were signing hundreds of these documents a day. Other 

documents appeared to have been backdated improperly and ineffectively or incorrectly notarized. While these documentation irregularities may sound minor, they have the potential to throw the 

foreclosure system—and possibly the mortgage loan system and 

housing market itself—into turmoil. At a minimum, in certain 

cases, signers of affidavits appear to have signed documents attesting to information that they did not verify and without a notary 

present. If this is the extent of the irregularities, then the issue 

may be limited to these signers and the foreclosure proceedings 

they were involved in, and in many cases, the irregularities may 

potentially be remedied by reviewing the documents more thoroughly and then resubmitting them. If, however, the problem is related not simply to a limited number of foreclosure documents but 

also to irregularities in the mortgage origination and pooling process, then the impact of the irregularities could be far broader, affecting a vast number of investors in the mortgage-backed securities (MBS) market, already completed foreclosures, and current 

homeowners. This latter scenario could result in extensive litigation, an extended freeze in the foreclosure market, and significant 

stress on bank balance sheets arising from the substantial repurchase liability that can arise from mistakes or misrepresentations 

in mortgage documents.3

C. Timeline 

After the housing market started to collapse in 2006, the effects 

rippled through the financial sector and led to disruptions in the 

credit markets in 2008 and 2009. In an economy that had been hit 

hard by the financial crisis and soon settled into a deep recession, 

the housing market declined, dragging down housing prices and increasing the likelihood of default. This put pressure on a variety 

of parties involved in the mortgage market. During the boom, there 

were many players involved in the process of lending, securitizing, 


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4For example, it was not uncommon for a commercial bank to perform both lending and servicing functions, and to have established separate lending and servicing arms of its organization. 

As discussed later in this report, the securitization process begins with a lender/originator, often 

but not always a commercial bank. Next, the mortgage is securitized by an investment bank. 

Finally, the mortgage is serviced, often also by a commercial bank or its subsidiary. Even where 

the same banks are listed as doing both lending and servicing, they did not necessarily service 

only the mortgages they originated. Source: Inside Mortgage Finance. 5See Office of the Special Inspector General for the Troubled Asset Relief Program, Quarterly 

Report to Congress, at 157 (Oct. 26, 2010) (online at www.sigtarp.gov/reports/congress/2010/ 

October2010_Quarterly_Report_to_Congress.pdf) (hereinafter ‘‘October 2010 SIGTARP Report’’). 6Servicer duties included fielding borrower inquiries, collecting mortgage payments from the 

borrowers, and remitting mortgage payments to the trust. See Id. at 157, 164. See also Congressional Oversight Panel, March Oversight Report: Foreclosure Crisis: Working Toward a Solution, 

at 40–42 (Mar. 6, 2009) (online at cop.senate.gov/documents/cop-030609-report.pdf) (hereinafter 

‘‘March 2009 Oversight Report’’). 7See March 2009 Oversight Report, supra note 6, at 40. 8See March 2009 Oversight Report, supra note 6, at 40–42. See also October 2010 SIGTARP 

Report, supra note 5, at 158. 9See October 2010 SIGTARP Report, supra note 5, at 157–158. In the spring of 2009, when 

Treasury announced its Making Home Affordable program, the centerpiece of which was HAMP, 

servicers took on the additional responsibility of processing all HAMP modifications. 10See March 2009 Oversight Report, supra note 6, at 39. 11Mortgages that are more than 90 days past due are concentrated in certain regions and 

states of the country, including California, Nevada, Arizona, Florida, and Georgia. See Federal 

Reserve Bank of New York, Q3 Credit Conditions (Nov. 8, 2010) (online at www.newyorkfed.org/ 

creditconditions/). Similarly, foreclosures are concentrated in certain states, including the socalled ‘‘sand states’’: Arizona, California, Nevada, and Florida. U.S. Department of Housing and 

Urban Development, Report to Congress on the Root Causes of the Foreclosure Crisis, at vi (Jan. 

2010) (online at www.huduser.org/Publications/PDF/Foreclosure_09.pdf). The Panel’s field hearings in Clark County, Nevada, Prince George’s County, Maryland, and Philadelphia, Pennsylvania, also touched on the subject of high concentrations of foreclosures in those regions. See 

Congressional Oversight Panel, Clark County, NV: Ground Zero of the Housing and Financial 

Crises (Dec. 16, 2008) (online at cop.senate.gov/hearings/library/hearing-121608- 

firsthearing.cfm); Congressional Oversight Panel, COP Hearing: Coping with the Foreclosure 

Crisis in Prince George’s County, Maryland (Feb. 27, 2009) (online at cop.senate.gov/hearings/ 

library/hearing-022709-housing.cfm); Congressional Oversight Panel, Philadelphia Field Hearing 

on Mortgage Foreclosures (Sept. 24, 2009) (online at cop.senate.gov/hearings/library/hearing092409-philadelphia.cfm). 12The details of ‘‘robo-signers’’ actions surfaced on the Internet in September 2010, including 

video and transcriptions of depositions filed by robo-signers. See, e.g., The Florida Foreclosure 

Fraud Weblog, Jeffrey Stephan Affidavits ‘Withdrawn’ by Florida Default Law Group (Sept. 15, 

2010) (online at floridaforeclosurefraud.com/2010/09/jeffrey-stephan-affidavits-withdrawn-by-florida-default-law-group/). Some of this information was made public in court documents. For inContinued 

and servicing mortgages, and many of these players took on multiple roles.4

The initial role of servicers was largely administrative.5 They 

were hired by the MBS investors to handle all back-office functions 

for existing loans, and generally acted as intermediaries between 

borrowers and MBS investors.6 However, when the housing bubble 

burst, and the number of delinquencies began to rise, the role of 

servicers evolved correspondingly.7 Servicer focus shifted from performing purely administrative tasks to engaging in active loss mitigation efforts.8 Servicers found themselves responsible for processing all defaults, modifications, short sales, and foreclosures.9

The servicers themselves have admitted that they were simply not 

prepared for the volume of work that the crisis generated.10 Thus, 

many servicers began subcontracting out much of their duties to 

so-called ‘‘foreclosure mills,’’ contractors that had significant incentives to move foreclosures along quickly. 

Thus, as the boom in the housing market mutated into a boom 

in foreclosures,11 banks rushed to move delinquent borrowers out 

of their homes as quickly as possible, leading, apparently, to procedures of which the best that can be said is that they were sloppy 

and cursory. Concerns with foreclosure irregularities first arose 

when depositions of so-called ‘‘robo-signers’’ came to light.12 In a 


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stance, in an order issued by a state court in Maine on September 24, 2010, the judge noted 

that it was undisputed that Jeffrey Stephan had signed an affidavit without reading it and that 

he had not been in the presence of a notary when he signed it. Order on Four Pending Motions 

at 3, Federal National Mortgage Assoc. v. Nicolle Bradbury, No. BRI–RE–09–65 (Me. Bridgton 

D. Ct. Sept. 24, 2010) (online at www.molleurlaw.com/themed/molleurlaw/files/uploads/ 

9_24_10%20Four%20Motions%20Order.pdf) (hereinafter ‘‘Federal National Mortgage Assoc. v. 

Nicolle Bradbury’’). 13GMAC Mortgage is a subsidiary of Ally Financial. The Panel examined Ally Financial, then 

named GMAC, in detail in its March 2010 report. See Congressional Oversight Panel, March 

Oversight Report: The Unique Treatment of GMAC Under TARP (Mar. 11, 2010) (online at 

cop.senate.gov/documents/cop-031110-report.pdf). 14Federal National Mortgage Assoc. v. Nicolle Bradbury, supra note 12. There are two primary concerns with affidavits. First: are the affidavits accurate? For example, even if the homeowner is indebted, the amount of the indebtedness is a part of the attestation. The amount of 

the indebtedness must be accurate because there might be a subsequent deficiency judgment 

against the homeowner, which would require the homeowner to cover the remaining amount 

owed to the lender. And even if there was no deficiency judgment, an inflated claim would increase the recovery of the mortgage servicer from the foreclosure sale proceeds to the detriment 

of other parties in the process. Second, even if the information in the affidavit is correct, it must 

be sworn out by someone with personal knowledge of the indebtedness; otherwise it is hearsay 

and generally not admissible as evidence. See, e.g., Transcript of Court Proceedings, GMAC 

Mortgage, LLC v. Debbie Viscaro, et al., No. 07013084CI (Fla. Cir. Ct. Apr. 7, 2010) (online at 

floridaforeclosurefraud.com/wp-content/uploads/2010/04/040710.pdf) (discussing whether affected 

affidavits were admissible). See generally Congressional Oversight Panel, Written Testimony of 

Katherine Porter, professor of law, University of Iowa College of Law, COP Hearing on TARP 

Foreclosure Mitigation Programs (Oct. 27, 2010) (online at cop.senate.gov/documents/testimony102710-porter.pdf) (hereinafter ‘‘Written Testimony of Katherine Porter’’). 15Federal National Mortgage Assoc. v. Nicolle Bradbury, supra note 12. In addition, a Florida 

court admonished GMAC for similar problems in 2006. Plaintiff’s Notice of Compliance with this 

Court’s Order Dated May 1, 2006, TCIF RE02 v. Leibowitz, No. 162004CA004835XXXXMA 

(June 14, 2006) (detailing GMAC’s policies on affidavits filed in foreclosure cases). These actions, 

if true, would be inconsistent with the usual documentation requirements necessary for proper 

processing of a foreclosure, giving rise to concerns that the foreclosure was not legally sufficient. 

See generally Written Testimony of Katherine Porter, supra note 14. 16 Bank of America Corporation, Statement from Bank of America Home Loans (Oct. 8, 2010) 

(online at mediaroom.bankofamerica.com/phoenix.zhtml?c=234503&p=irolnewsArticle&ID=1480657&highlight=) (hereinafter ‘‘Statement from Bank of America Home 

Loans’’). At the same time, Bank of America agreed to indemnify Fidelity National Financial, 

a title insurer, for losses directly incurred by ‘‘failure to comply with state law or local practice 

on both transactions in which foreclosure has already occurred or been initiated and those to 

be initiated in the future.’’ See Fidelity National Financial, Fidelity National Financial, Inc., Re- ports EPS of $0.36 (Oct. 20, 2010) (online at files.shareholder.com/downloads/FNT/ 

1051799117x0x411089/209d61a9-8a05-454c-90d1-4a78e0a7c4ae/ 

FNF_News_2010_10_20_Earnings.pdf). As further described below in Section D.2, title insurance is a critical piece of the mortgage market. Generally, title insurance insures against the 

possibility that title is encumbered or unclear, and thereby provides crucial certainty in transactions involving real estate. The insurance is retrospective—covering the history of the property 

until, but not after the sale, and is issued after a review of the land title records. For a buyer, 

title insurance therefore insures against the possibility that a defect in the title that is not apparent from the public records will affect their ownership. Industry sources conversations with 

Panel staff (Nov. 9, 2010). A title insurer’s refusal to issue insurance can significantly hamper 

the orderly transfer of real estate and interests collateralized by real estate. Bank of America’s 

indemnity agreement with Fidelity National Financial shifts the risk of covered losses arising 

from the foreclosure irregularities from Fidelity National to Bank of America. 17Twenty-two states require judicial oversight of foreclosure proceedings. In these judicial 

foreclosure states the mortgagee must establish its claim—show that a borrower is in default— 

before a judge. In non-judicial states a foreclosure can proceed upon adequate and timely notice 

June 7, 2010, deposition, Jeffrey Stephan, who worked for GMAC 

Mortgage 13 as a ‘‘limited signing officer,’’ testified that he signed 

400 documents each day. In at least some cases, he signed affidavits without reading them and without a notary present.14 He also 

testified that in doing so, he acted consistently with GMAC Mortgage’s policies.15 Similarly, faced with revelations that robo-signers 

had signed tens of thousands of foreclosure documents without actually verifying the information in them, Bank of America announced on October 8, 2010, that it would freeze foreclosure sales 

in all 50 states until it could investigate and address the irregularities.16 GMAC Mortgage took similar action, announcing that while 

it would not suspend foreclosures, it had ‘‘temporarily suspended 

evictions and post-foreclosure closings’’ in 23 states.17 In a stateVerDate Mar 15 2010 02:17 Dec 02, 2010 Jkt 061835 PO 00000 Frm 00014 Fmt 6602 Sfmt 6602 E:\HR\OC\A835.XXX A835

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to the borrower, as defined by statute. In non-judicial states, a power of sale clause included 

in a deed of trust allows a trustee to conduct a non-judicial foreclosure. Non-judicial foreclosures 

can proceed more quickly since they do not require adjudication. Mortgage Bankers Association, 

Judicial Versus Non-Judicial Foreclosure (Oct. 26, 2010) (online at www.mbaa.org/files/ 

ResourceCenter/ForeclosureProcess/JudicialVersusNon-JudicialForeclosure.pdf). Typically, states 

that rely on mortgages are judicial foreclosure states, while states that rely on deeds of trust 

are non-judicial foreclosure states. Standard & Poor’s, Structured Finance Research Week: How 

Will the Foreclosure Crisis Affect U.S. Home Prices? (Oct. 21, 2010) (hereinafter ‘‘S&P on Foreclosure Crisis’’). 18 Ally Financial, Inc., GMAC Mortgage Provides Update on Mortgage Servicing Process (Sept. 

24, 2010) (online at media.ally.com/index.php?s=43&item=417). 19To date, GMAC Mortgage and Bank of America have only resumed foreclosures in judicial 

foreclosure states and are still reviewing their procedures in non-judicial foreclosure states. 20 Ally Financial, Inc., GMAC Mortgage Statement on Independent Review and Foreclosure 

Sales (Oct. 12, 2010) (online at media.ally.com/index.php?s=43&item=421) (hereinafter ‘‘GMAC 

Mortgage Statement on Independent Review and Foreclosure Sales’’). 21 Bank of America Corporation, Statement from Bank of America Home Loans (Oct. 18, 2010) 

(online at mediaroom.bankofamerica.com/phoenix.zhtml?c=234503&p=irolnewsArticle&ID=1483909&highlight=) (hereinafter ‘‘Statement from Bank of America Home 

Loans’’). 22See Written Testimony of Katherine Porter, supra note 14, at 10 (‘‘In the wake of these parties’ longstanding allegations and findings of inappropriate and illegal practices, I am unable 

to give weight to recent statements by banks such as Bank of America that only 10 to 25 of 

the first several hundred loans that it has reviewed have problems.’’). 23Wells Fargo & Company, Wells Fargo Provides Update on Foreclosure Affidavits and Mortgage Securitizations (Oct. 27, 2010) (online at www.wellsfargo.com/press/2010/ 

20101027_Mortgage) (hereinafter ‘‘Wells Fargo Update on Affidavits and Mortgage 

Securitizations’’). 

ment, it referred to the issue as a ‘‘procedural error . . . in certain 

affidavits’’ and stated that ‘‘we are confident that the processing errors did not result in any inappropriate foreclosures.’’ GMAC also 

announced that the company had taken three remedial steps to address the problem: additional education and training for employees, 

the release of a ‘‘more robust policy’’ to govern the process, and the 

hiring of additional staff to assist with foreclosure processing.18

These voluntary, privately determined suspensions were brief.19

On October 12, 2010, GMAC Mortgage released a statement indicating that in cases in which it had initiated a review process for 

its foreclosure procedures, it would resume foreclosure proceedings 

once any problems had been identified and, where necessary, addressed. It also noted that it ‘‘found no evidence to date of any inappropriate foreclosures.’’ 20 On October 18, Bank of America announced that it had completed its review of irregularities in the 23 

states that require judicial review of foreclosure proceedings and 

that it would begin processing foreclosure affidavits for 102,000 

foreclosure proceedings in those states. It stated that it would review proceedings in the remaining 27 states on a case-by-case basis 

and that foreclosure sales in those states would be delayed until 

those reviews are complete. It further stated that in all states, it 

appeared that the ‘‘basis of our foreclosure decisions is accurate.’’ 21

Various commentators, however, have questioned Bank of America’s ability to make such determinations in such a short timeframe.22 Then, on October 27, another large bank entered the fray 

when Wells Fargo announced that it had uncovered irregularities 

in its foreclosure processes and stated that it would submit supplemental affidavits in 55,000 foreclosure actions.23

Meanwhile, as the revelations of irregularities quickly multiplied, 

some argued that over and above the banks’ and servicers’ voluntary actions, the federal government should impose a nationwide 


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24See, e.g., Office of Senator Harry Reid, Reid Welcomes Bank of America Decision, Calls On 

Others To Follow Suit (Oct. 8, 2010) (online at reid.senate.gov/newsroom/ 

pr_101008_bankofamerica.cfm) (hereinafter ‘‘Reid Welcomes Bank of America Decision’’); Dean 

Baker, Foreclosure Moratorium: Cracking Down on Liar Liens, Center for Economic and Policy 

Research (Oct. 18, 2010) (online at www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/ 

foreclosure-moratorium-cracking-down-on-liar-liens) (hereinafter ‘‘Foreclosure Moratorium: 

Cracking Down on Liar Liens’’). 25Shaun Donovan, secretary, U.S. Department of Housing and Urban Development, How We 

Can Really Help Families (Oct. 18, 2010) (online at portal.hud.gov/portal/page/portal/HUD/press/ 

blog/2010/blog2010-10-18). 26 National Association of Attorneys General, 50 States Sign Mortgage Foreclosure Joint State- ment (Oct. 13, 2010) (online at www.naag.org/joint-statement-of-the-mortgage-foreclosuremultistate-group.php) (hereinafter ‘‘50 States Sign Mortgage Foreclosure Joint Statement’’). 27 Cases involved suits against Bank of America (as the parent of loan originator Countrywide) 

claiming violations of representations and warranties and sought to enforce put-back provisions. 

Greenwich Financial Services Distressed Fund 3 L.L.C. vs. Countrywide Financial Corp, et al., 

1:08-cv-11343–RJH (S.D.N.Y. Oct. 15, 2010); Footbridge Limited Trust and OHP Opportunity 

Trust vs. Bank of America, CV00367 (S.D.N.Y. Oct 1, 2010). 28See Stephen R. Buchenroth and Gretchen D. Jeffries, Recent Foreclosure Cases: Lenders Be- ware (June 2007) (online at www.abanet.org/rppt/publications/ereport/2007/6/ 

OhioForeclosureCases.pdf); Wells Fargo v. Jordan, 914 N.E.2d 204 (Ohio 2009) (‘‘If plaintiff has 

offered no evidence that it owned the note and mortgage when the complaint was filed, it would 

not be entitled to judgment as a matter of law.’’); Christopher Lewis Peterson, Foreclosure, 

Subprime Mortgage Lending, and the Mortgage Electronic Registration System, University of 

Cincinnati Law Review, Vol. 78, No. 4, at 1368–1371 (Summer 2010) (online at papers.ssrn.com/ 

sol3/papers.cfm?abstract_id=1469749) (hereinafter ‘‘Cincinnati Law Review Paper on Foreclosure’’); MERSCORP, Inc. v. Romaine, 861 N.E. 2d 81 (N.Y. 2006). Accordingly, a second set 

moratorium on foreclosures.24 Housing and Urban Development 

Secretary Shaun Donovan rejected the idea, arguing that ‘‘a national, blanket moratorium on all foreclosure sales would do far 

more harm than good.’’ 25 At the same time, on October 13, attorneys general from all 50 states 26 announced a bipartisan effort to 

look into the possibility that documents or affidavits were improperly submitted in their jurisdictions. 

Although the public focus today lies generally on foreclosures, the 

possibility of document irregularities in mortgage transactions has 

expanded beyond their significance to foreclosure proceedings. Recently, investors have begun to claim that similar irregularities in 

origination and pooling of loans should trigger actions against entities in the mortgage origination, securitization, and servicing industries.27

D. Legal Consequences of Document Irregularities 

The possible legal consequences of the documentation irregularities described above range from minor, curable title defects for certain foreclosed homes in certain states to more serious consequences such as the unenforceability of foreclosure claims and 

other ownership rights that rely on the ability to establish clear 

title to real property, forced put-backs of defective mortgages to 

originators, and market upheaval. The severity and likelihood of 

these various possible consequences depend on whether the irregularities are pervasive and when in the process they occurred. 

Effective transfers of real estate depend on parties’ being able to 

answer seemingly straightforward questions: who owns the property? how did they come to own it? can anyone make a competing 

claim to it? The irregularities have the potential to make these 

seemingly simple questions complex. As a threshold matter, a party 

seeking to enforce the rights associated with the mortgage must 

have standing in court, meaning that a party must have an interest in the property sufficient that a court will hear their claim and 

can provide them with relief.28 For a mortgage, ‘‘[a] mortgage may 


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of problems relates to the chain of title on mortgages and the ability of the foreclosing party 

to prove that it has legal standing to foreclose. While these problems are not limited to the 

securitization market, they are especially acute for securitized loans because there are more 

complex chain of title issues involved. 29 Restatement (Third) of Prop. (Mortgages) § 5.4(c) (1997). Only the proven mortgagee may 

maintain a foreclosure action. The requirement that a foreclosure action be brought only by the 

actual mortgagee is at the heart of the issues with foreclosure irregularities. If the homeowner 

or the court challenges the claim of the party bringing a foreclosure action that it is the mortgagee (and was when the foreclosure was filed), then evidentiary issues arise as to whether the 

party bringing the foreclosure can in fact prove that it is the mortgagee. The issues involved 

are highly complex areas of law, but despite the complexity of these issues, they should not be 

dismissed as mere technicalities. Rather, they are legal requirements that must be observed 

both as part of due process and as part of the contractual bargain made between borrowers and 

lenders. 30That party must either own the mortgage and the note or be legally empowered to act on 

the owner’s behalf. Servicers acting on behalf of a trust or an originator do not own the mortgage, but by contract are granted the ability to act on behalf of the trust or the originator. See 

Federal Trade Commission, Facts for Consumers (online at www.ftc.gov/bcp/edu/pubs/consumer/ 

homes/rea10.shtm) (accessed Nov. 12, 2010) (‘‘In today’s market, loans and the rights to service 

them often are bought and sold. In many cases, the company that you send your payment to 

is not the company that owns your loan.’’). See also October 2010 SIGTARP Report, supra note 

5, at 160 (describing clients of servicers). 31Laws governing the remedies available to a lender foreclosing on a property vary considerably. States also differ markedly in how long it takes the lender to foreclose depending on the 

available procedures. In general, claimants can seek to recover loan amounts by foreclosing on 

the property securing the debt. If the loan is ‘‘non-recourse,’’ the lender only may foreclose upon 

the property, but if the loan is ‘‘recourse,’’ the lender may foreclose upon the property and other 

borrower assets. Most states are recourse states. A loan in a recourse state allows a mortgagee 

to foreclose upon property securing a promissory note and, if that property is insufficient to discharge the debt, move against the borrower’s other assets. In non-recourse states, recovery of 

the loan amount is limited to the loan collateral. Put another way, the lender cannot go after 

the borrower’s other assets in a non-recourse state if the property is insufficient to discharge 

the debt. It is worth noting that even in recourse states, given the current economic climate, 

the mortgagees’ recourse to the borrower’s personal assets may be somewhat illusory since they 

may be minimal relative to the costs and delay in pursuing and collecting on a deficiency judgments. See Andra C. Ghent and Marianna Kudlyak, Recourse and Residential Mortgage Default: 

Theory and Evidence from U.S. States, Federal Reserve Bank of Richmond Working Paper, No. 

09–10, at 1–2 (July 7, 2009) (online at www.fhfa.gov/webfiles/15051/website_ghent.pdf). 32 Christopher Lewis Peterson, associate dean for academic affairs and professor of law, S.J. 

Quinney College of Law, University of Utah, conversations with Panel staff (Nov. 8, 2010). 

be enforced only by, or in behalf of, a person who is entitled to enforce the obligation the mortgage secures.’’ 29 Thus, the only party 

that may enforce the rights associated with the mortgage, with 

standing to take action on a mortgage in a court, must be legally 

able to act on the mortgage.30 Accordingly, standing is critical for 

a successful foreclosure, because if the party bringing the foreclosure does not have standing to enforce the rights attached to the 

mortgage and the note, that party may not be able to take the 

property with clear title that can be passed on to another buyer.31

Thus, if prior transfers of the mortgage were unsuccessful or improper, subsequent transfers of the property, such as a foreclosure 

or even an ordinary sale, could be affected. Further, failure to foreclose properly—whether because the foreclosing party did not actually hold the mortgage and the note, or because robo-signing affected the homeowner’s due process rights—means that the prior 

homeowner may be able to assert claims against a subsequent 

owner of the property.32 In this way, documentation irregularities 

can affect title to a property at a number of stages, as further described below. 


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33 Black’s Law Dictionary, at 1522 (2004). 34See Cincinnati Law Review Paper on Foreclosure, supra note 28. 35There are two documents that need to be transferred as part of the securitization process— 

a promissory note and the security instrument (the mortgage or deed of trust). The promissory 

note embodies the debt obligation, while the security instrument provides that if the debt is not 

repaid, the creditor may sell the designated collateral (the house). Both the note and the mortgage need to be properly transferred. Without the note, a mortgage is unenforceable, while without the mortgage, a note is simply an unsecured debt obligation, no different from credit card 

debt. See FBR Foreclosure Mania Conference Call, supra note 3. The rules for these transfers 

are generally governed by the Uniform Commercial Code (UCC), although one author states that 

the application of the UCC to the transfer of the note is not certain. See Dale A. Whitman, How 

Negotiability Has Fouled Up the Secondary Mortgage Market, and What to Do About It, 

Pepperdine Law Review, Vol. 37, at 758–759 (2010). 

States adopt articles of and revisions to the UCC individually, and so there can be variation 

among states in the application of the UCC. This report does not attempt to identify all of the 

possible iterations. Rather, it describes general and common applications of the UCC to such 

transactions. 

There are two methods by which a promissory note may be transferred. First, it may be transferred by ‘‘negotiation,’’ the signing over of individual promissory notes through indorsement, in 

the same way that a check can be transferred via indorsement. See UCC §§ 3–201, 3–203. The 

pooling and servicing agreements (PSAs) for securitized loans generally contemplate transfer 

through negotiation. Typical language in PSAs requires the delivery to the securitization trust 

of the notes and the mortgages, indorsed in blank. Alternatively, a promissory note may be 

transferred by a sale contract, also governed by whether a state has adopted particular revisions 

to the UCC. In many states, in order for a transfer to take place under the relevant portion 

of the UCC, there are only three requirements: the buyer of the promissory note must give 

value, there must be an authenticated document of sale that describes the promissory note, and 

the seller must have rights in the promissory note being sold. UCC § 9–203(a)-(b). 

1. Potential Flaws in the Recording and Transfer of Mortgages and Violations of Pooling and Servicing Agreements 

a. Mortgage Recordation, Perfecting Title, and Transferring Title 

i. Title 

The U.S. real property market depends on a seller’s ability to 

convey ‘‘clear title’’: an assurance that the purchaser owns the 

property free of encumbrances or competing claims.33 Laws governing the transfer of real property in the United States were designed to create a public, transparent recordation system that supplies reliable information on ownership interests in property. Each 

of the 50 states has laws governing title to land within its legal 

boundaries. Every county in the country maintains records of who 

owns land there, of transfers of ownership, and of related mortgages or deeds of trust. While each state’s laws have unique features, their basic requirements are the same, consistent with the 

notion that the purpose of the recording system is to establish certainty regarding property ownership. In order to protect ownership 

interests, fully executed, original (commonly referred to as ‘‘wet 

ink’’) documents must be recorded in a grantor/grantee index at a 

county recording office.34 In the case of a purchaser or transferee, 

a properly recorded deed describing both the property and the parties to the transfer establishes property ownership. 

ii. Transfer 

In a purchase of a home using a mortgage loan, required documents include (a) a promissory note establishing the mortgagor’s 

personal liability, (b) a mortgage evidencing the security interest in 

the underlying collateral, and (c) if the mortgage is transferred, 

proper assignments of the mortgage and the note.35 There are a 


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The first two requirements should be easily met in most securitizations; the transfer of the 

mortgage loans at each stage of the securitization involves the buyer giving the seller value and 

a document of sale (a mortgage purchase and sale agreement or a PSA) that should include a 

schedule identifying the promissory notes involved. The third requirement, however, that the 

seller must have rights in the promissory note being sold, is more complicated, as it requires 

an unbroken chain of title back to the loan’s originator. While the loan sale documents plus their 

schedules are evidence of such a chain of title, they cannot establish that the loan was not previously sold to another party. 

Further, this discussion only addresses the validity of transfers between sellers and buyers 

of mortgage loans. It does not address the enforceability of those loans against homeowners, 

which requires physical possession of the original note. Thus, for both securitized and nonsecuritized loans, it is necessary for a party to show that it is entitled to enforce the promissory 

note (and therefore generally that it is a holder of the physical original note) in order to complete a foreclosure successfully. 

Perhaps more critically, parties are free to contract around the UCC. UCC § 1–302. This raises 

the question of whether PSAs for MBS provide for a variance from the UCC by agreement of 

the parties. The PSA is the document that provides for the transfer of the mortgage and notes 

from the securitization sponsor to the depositor and thence to the trust. The PSA is also the 

document that creates the trust. The transfer from the originator to the sponsor is typically governed by a separate document, although sections of it may be incorporated by reference in the 

PSA. 

If a PSA is considered a variation by agreement from the UCC, then there is a question of 

what the PSA itself requires to transfer the mortgage loans and whether those requirements 

have been met. In some cases, PSAs appear to require a complete chain of indorsements on the 

notes from originator up to the depositor, with a final indorsement in blank to the trust. A complete chain of indorsements, rather than a single indorsement in blank with the notes transferred thereafter as bearer paper, is important for establishing the ‘‘bankruptcy remoteness’’ of 

the trust assets. A critical part of securitization is to establish that the trust’s assets are bankruptcy remote, meaning that they could not be claimed by the bankruptcy estate of an upstream 

transferor of the assets. Without a complete chain of indorsements, it is difficult, if not impossible, to establish that the loans were in fact transferred from originator to sponsor to depositor 

to trust, rather than directly from originator or sponsor to the trust. If the transfer were directly 

from the originator or sponsor to the trust, the loans could possibly be claimed as part of the 

originator’s or sponsor’s bankruptcy estate. The questions about what the transfers required, 

therefore, involve both the question as to whether the required transfers actually happened, as 

well as whether, if they happened, they were legally sufficient. 

number of ways for a mortgage originator to proceed upon entering 

into a loan secured by real property. They may keep the loan on 

their own books; these are so-called ‘‘whole loans.’’ However, if the 

loan is sold in a secondary market—either as a whole loan or in 

a securitization process—the loan must be properly transferred to 

the purchaser. To be transferred properly, both the loan and accompanying documentation must be transferred to the purchaser, 

and the transfer must be recorded. 


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36FBR Foreclosure Mania Conference Call, supra note 3. 37For an overview of REMICs, see Federal National Mortgage Association, Basics of REMICs 

(June 16, 2009) (online at www.fanniemae.com/mbs/mbsbasics/remic/index.jhtml). See also Internal Revenue Service, Final Regulations Relating to Real Estate Mortgage Investment Conduits, 

26 CFR § 1 (Aug. 17, 1995) (online at www.irs.gov/pub/irs-regs/td8614.txt). Only the MBS investors are taxed on their income from the trusts’ payments on the MBS. REMICs are supposed 

to be passive entities. Accordingly, with few exceptions, a REMIC may not receive new assets 

after 90 days have passed since its creation, or there will be adverse tax consequences. Thus, 

if a transfer of a loan was not done correctly in the first place, proper transfer now could endanger the REMIC status. For an overview of residential mortgage-backed securities in general, see 

American Securitization Forum, ASF Securitization Institute: Residential Mortgage-Backed Securities (2006) (online at www.americansecuritization.com/uploadedFiles/RMBS%20Outline.pdf). 38See Section D.1.a.ii, supra. 

iii. Mortgage Securitization Process 

FIGURE 1: TRANSFER OF RELEVANT PAPERWORK IN SECURITIZATION PROCESS 36

Securitizations of mortgages require multiple transfers, and, accordingly, multiple assignments. Mortgages that were securitized 

were originated through banks and mortgage brokers—mortgage 

originators. Next they were securitized by investment banks—the 

sponsors—through the use of special purpose vehicles, trusts that 

qualify for Real Estate Mortgage Investment Conduit (REMIC) status. These trusts are bankruptcy-remote, tax-exempt vehicles that 

pooled the mortgages transferred to them and sold interests in the 

income from those mortgages to investors in the form of shares. 

The pools were collateralized by the underlying real property, because a mortgage represents a first-lien security interest on an 

asset in the pool—a house.37 A governing document for 

securitizations called a pooling and servicing agreement (PSA) includes various representations and warranties for the underlying 

mortgages. It also describes the responsibilities of the trustee, who 

is responsible for holding the recorded mortgage documents, and of 

the servicer, who plays an administrative role, collecting and disbursing mortgage and related payments on behalf of the investors 

in the MBS. 

As described above, in order to convey good title into the trust 

and provide the trust with both good title to the collateral and the 

income from the mortgages, each transfer in this process required 

particular steps.38 Most PSAs are governed by New York law and 


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39FBR Foreclosure Mania Conference Call, supra note 3. 40 N.Y. Est. Powers & Trusts Law § 7–2.4; FBR Foreclosure Mania Conference Call, supra note 

3. 41FBR Foreclosure Mania Conference Call, supra note 3. 42 Amended Complaint at Exhibit 5, page 13, Deutsche Bank National Trust Company v. Federal Deposit Insurance Corporation, No. 09–CV–1656 (D.D.C. Sept. 8, 2010) (hereinafter ‘‘Deutsche Bank v. Federal Deposit Insurance Corporation’’). 43See FBR Foreclosure Mania Conference Call, supra note 3. 44See, e.g., FBR Foreclosure Mania Conference Call, supra note 3. 45 Restatement (Third) of Prop. (Mortgages) § 5.4 cmt. B (1997). 46 Christopher Lewis Peterson, associate dean for academic affairs and professor of law, S.J. 

Quinney College of Law, University of Utah, conversations with Panel staff (Nov. 8, 2010). 47MERS conversations with Panel staff (Nov. 10, 2010). See Christopher Lewis Peterson, Two 

Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory, Real Property, Probate, and Trust Law Journal (forthcoming) (online at papers.ssrn.com/sol3/papers.cfm?abstract_id=1684729). 

create trusts governed by New York law.39 New York trust law requires strict compliance with the trust documents; any transaction 

by the trust that is in contravention of the trust documents is void, 

meaning that the transfer cannot actually take place as a matter 

of law.40 Therefore, if the transfer for the notes and mortgages did 

not comply with the PSA, the transfer would be void, and the assets would not have been transferred to the trust. Moreover, in 

many cases the assets could not now be transferred to the trust.41

PSAs generally require that the loans transferred to the trust not 

be in default, which would prevent the transfer of any non-performing loans to the trust now.42 Furthermore, PSAs frequently 

have timeliness requirements regarding the transfer in order to ensure that the trusts qualify for favored tax treatment.43

Various commentators have begun to ask whether the poor recordkeeping and error-filled work exhibited in foreclosure proceedings, described above, is likely to have marked earlier stages 

of the process as well. If so, the effect could be that rights were not 

properly transferred during the securitization process such that 

title to the mortgage and the note might rest with another party 

in the process other than the trust.44

iv. MERS 

In addition to the concerns with the securitization process described above, a method adopted by the mortgage securitization industry to track transfers of mortgage servicing rights has come 

under question. A mortgage does not need to be recorded to be enforceable as between the mortgagor and the mortgagee or subsequent transferee, but unless a mortgage is recorded, it does not 

provide the mortgagee or its subsequent transferee with priority 

over subsequent mortgagees or lien holders.45

During the housing boom, multiple rapid transfers of mortgages 

to facilitate securitization made recordation of mortgages a more 

time-consuming, and expensive process than in the past.46 To alleviate the burden of recording every mortgage assignment, the 

mortgage securitization industry created the Mortgage Electronic 

Registration Systems, Inc. (MERS), a company that serves as the 

mortgagee of record in the county land records and runs a database 

that tracks ownership and servicing rights of mortgage loans.47

MERS created a proxy or online registry that would serve as the 

mortgagee of record, eliminating the need to prepare and record 

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48MERS conversations with Panel staff (Nov. 10, 2010); John R. Hodge and Laurie Williams, 

Mortgage Electronic Registration Systems, Inc.: A Survey of Cases Discussing MERS’ Authority 

to Act, Norton Bankruptcy Law Adviser, at 2 (Aug 2010) (hereinafter ‘‘A Survey of Cases Discussing MERS’ Authority to Act’’). 49Members pay an annual membership fee and $6.95 for every loan registered, versus ap- proximately $30 in fees for filing a mortgage assignment at a local county land office. 

MERSCORP, Inc., Membership Kit (Oct. 2009) (online at www.mersinc.org/membership/ WinZip/ 

MERSeRegistryMembershipKit.pdf); Cincinnati Law Review Paper on Foreclosure, supra note 

28, at 1368–1371. See also MERSCORP, Inc. v. Romaine, 861 N.E. 2d 81 (N.Y. 2006). 50MERS conversations with Panel staff (Nov. 10, 2010). 51 Cincinnati Law Review Paper on Foreclosure, supra note 28, at 1362. 52See A Survey of Cases Discussing MERS’ Authority to Act, supra note 48, at 3. 53For instance, in a question-and-answer session during a recent earnings call with investors, 

Jamie Dimon, CEO and chairman of JPMorgan Chase, said that the firm had stopped using 

MERS ‘‘a while back.’’ JPMorgan Chase & Co., Q3 2010 Earnings Call Transcript (Oct. 13, 2010) 

(online at www.morningstar.com/earn-0/ earnings_18244835-jp-morgan-chase-co-q3- 

2010.aspx.shtml) (hereinafter ‘‘Q3 2010 Earnings Call Transcript’’). See also JPM on Foreclosures, MERS, supra note 3. This, however, related only to the use of MERS to foreclose. 

MERS conversations with Panel staff (Nov. 10, 2010). 54See generally Cincinnati Law Review Paper on Foreclosure, supra note 28. Cases addressed 

questions as to standing and as to whether, by separating the mortgage and the note, the mortgage had been rendered invalid (thus invalidating the security interest in the property). See A 

Survey of Cases Discussing MERS’ Authority to Act, supra note 48, at 20–21 (‘‘These interpretive problems and inconsistencies have provoked some courts to determine the worst possible 

fate for secured loan buyers—that their mortgages were not effectively transferred or even that 

the mortgages have been separated from the note and are no longer enforceable. . . . Whether 

the MERS construct holds water is being robustly tested in a variety of contexts. Given the pervasiveness of MERS, if the construct is not viable, if MERS cannot file foreclosures, and, perhaps most importantly, cannot even record or execute an assignment of a mortgage, what 

then?’’). 55See, e.g., Mortg. Elec. Registry Sys. v. Azize, 965 So. 2d 151 (Fla. Dist. Ct. App. 2007). See 

also A Survey of Cases Discussing MERS’ Authority to Act, supra note 48, at 9. 56Mortg. Elec. Registry Sys. v. Johnston, No. 420–6–09 Rdcv (Rutland Superior Ct., Vt., Oct. 

28, 2009) (determining that MERS did not have standing to initiate the foreclosure because the 

note and mortgage had been separated). 

ferred from one MERS member to another.48 In essence, it attempted to create a paperless mortgage recording process overlying 

the traditional, paper-intense mortgage tracking system, in which 

MERS would have standing to initiate foreclosures.49

MERS experienced rapid growth during the housing boom. Since 

its inception in 1995, 66 million mortgages have been registered in 

the MERS system and 33 million MERS-registered loans remain 

outstanding.50 During the summer of 2010, one expert estimated 

that MERS was involved in 60 percent of mortgage loans originated in the United States.51

Widespread questions about the efficacy of the MERS model did 

not arise during the boom, when home prices were escalating and 

the incidence of foreclosures was minimal.52 But as foreclosures 

began to increase, and documentation irregularities surfaced in 

some cases and raised questions about a wide range of legal issues, 

including the legality of foreclosure proceedings in general,53 some 

litigants raised questions about the validity of MERS.54 There is 

limited case law to provide direction, but some state courts have 

rendered verdicts on the issue. In Florida, for example, appellate 

courts have determined that MERS had standing to bring a foreclosure proceeding.55 On the other hand, in Vermont, a court determined that MERS did not have standing.56

In the absence of more guidance from state courts, it is difficult 

to ascertain the impact of the use of MERS on the foreclosure process. The uncertainty is compounded by the fact that the issue is 

rooted in state law and lies in the hands of 50 states’ judges and 

legislatures. If states adopt the Florida model, then the issue is 

likely to have a limited effect. However, if more states adopt the 


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57MERS was used by the most active participants in the securitization market including the 

largest banks (for example, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and 

Fannie Mae and Freddie Mac), and processed 60 percent of all MBS. See MERSCORP, Inc., 

SunTrust Becomes Third Major Mortgage Provider in Recent Months to Require MERS System 

(Mar. 18, 2010) (online at www.mersinc.org/newsroom/press_details.aspx?id=235). According to 

MERS, it has acted as the party foreclosing for one in five of the delinquent mortgages on its 

system. MERS conversations with Panel staff (Nov. 10, 2010). 58See S&P on Foreclosure Crisis, supra note 17. 59 Christopher Lewis Peterson, associate dean for academic affairs and professor of law at the 

S.J. Quinney College of Law at the University of Utah, conversations with Panel staff (Nov. 8, 

2010). 60This section attempts to provide a general description of put-backs. Put-backs have been 

an issue throughout the financial crisis, typically in the context of questions about underwriting 

standards. See, e.g., Federal National Mortgage Association, Form 10–K for the Fiscal Year 

Ended December 31, 2009, at 9 (Feb. 26, 2010) (online at www.sec.gov/Archives/edgar/data/ 

310522/000095012310018235/w77413e10vk.htm) (‘‘As delinquencies have increased, we have accordingly increased our reviews of delinquent loans to uncover loans that do not meet our underwriting and eligibility requirements. As a result, we have increased the number of demands we 

make for lenders to repurchase these loans or compensate us for losses sustained on the loans, 

as well as requests for repurchase or compensation for loans for which the mortgage insurer 

rescinds coverage.’’). Documentation irregularities may provide an additional basis for put-backs, 

although the viability of these put-back claims will depend on a variety of deal-specific issues, 

such as the particular representations and warranties that were incorporated into the PSA, 

which in turn often are related to whether the MBSs are agency or private-label securities. Although private-label MBS PSAs typically included weaker representations regarding the quality 

of the loans and underwriting, they still contain representations regarding proper transfer of 

the documents to the trust. 61Failure to transfer the loans properly would create two sources of liability: one would be 

in rendering the owner of the mortgage and the note uncertain, and the other would be a breach 

of contract claim under the PSA. For an example of typical language in representations and 

warranties contained in PSAs or incorporated by reference from mortgage loan purchase agreements executed by the mortgage originator, see Deutsche Bank v. Federal Deposit Insurance 

Corporation, supra note 42 (‘‘. . . and that immediately prior to the transfer and assignment 

Continued 

Vermont model, then the issue may complicate the ability of various players in the securitization process to enforce foreclosure 

liens.57 If sufficiently widespread, these complications could have a 

substantial effect on the mortgage market, inasmuch as it would 

destabilize or delegitimize a system that has been embedded in the 

mortgage market and used by multiple participants, both government and private. Although it is impossible to say at present what 

the ultimate result of litigation on MERS will be, holdings adverse 

to MERS could have significant consequences to the market. 

If courts do adopt the Vermont view, it is possible that the impact may be mitigated if market participants devise a viable 

workaround. For example, according to a report released by Standard & Poor’s, ‘‘most’’ market participants believe that it may be 

possible to solve any MERS-related problems by taking the mortgage out of MERS and putting it in the mortgage owner’s name 

prior to initiating a foreclosure proceeding.58 According to one expert, the odds that the status of MERS will be settled quickly are 

low.59

b. Violations of Representations and Warranties in the 

PSA 60

Residential mortgage-backed securities’ PSAs typically contain or 

incorporate a variety of representations and warranties. These representations and warranties cover such topics as the organization 

of the sponsor and depositor, the quality and status of the mortgage loans, and the validity of their transfers. 

More particularly, PSAs, whose terms are unique to each MBS, 

include representations and warranties by the originator or seller 

relating to the conveyance of good title,61 documentation for the 


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of the Mortgage Loans to the Trustee, the Depositor was the sole owner and had good title to 

each Mortgage Loan, and had full right to transfer and sell each Mortgage Loan to the Trustee 

free and clear.’’). 62See Deutsche Bank v. Federal Deposit Insurance Corporation, supra note 42 (‘‘Each Mortgage Note, each Mortgage, each Assignment and any other document required to be delivered 

by or on behalf of the Seller under this Agreement or the Pooling and Servicing Agreement to 

the Purchaser or any assignee, transferee or designee of the Purchaser for each Mortgage Loan 

has been or will be . . . delivered to the Purchaser or any such assignee, transferee or designee. 

With respect to each Mortgage Loan, the Seller is in possession of a complete Mortgage File 

in compliance with the Pooling and Servicing Agreement . . . The Mortgage Note and the related Mortgage are genuine, and each is the legal, valid and binding obligation of the Mortgagor 

enforceable against the Mortgagor by the mortgagee or its representative in accordance with its 

terms, except only as such enforcement may be limited by bankruptcy, insolvency . . . .’’). These 

representations and warranties generally state that the documents submitted for loan underwriting were not falsified and contain no untrue statement of material fact or omit to state a 

material fact required to be stated therein and are not misleading and that no error, omission, 

misrepresentation, negligence, or fraud occurred in the loan’s origination or insurance. 63See Deutsche Bank v. Federal Deposit Insurance Corporation, supra note 42 (‘‘Each Mortgage Loan was underwritten in accordance with the Seller’s underwriting guidelines as described in the Prospectus Supplement as applicable to its credit grade in all material respects.’’). 

Many concerns over underwriting standards have surfaced in the wake of the housing boom, 

such as lack of adequate documentation, lack of income verification, misrepresentation of income 

and job status, and haphazard appraisals. Even before the more recent emergence of the issue 

of document irregularities, institutions were pursuing put-back actions to address concerns over 

underwriting quality. See Federal National Mortgage Association, Form 10–Q for the Quarterly 

Period Ended June 30, 2010, at 95 (Aug. 5, 2010) (online at www.sec.gov/Archives/edgar/data/ 

310522/000095012310073427/w79360e10vq.htm) (‘‘Our mortgage seller/servicers are obligated to 

repurchase loans or foreclosed properties, or reimburse us for losses if the foreclosed property 

has been sold, if it is determined that the mortgage loan did not meet our underwriting or eligibility requirements or if mortgage insurers rescind coverage.’’). 64See Deutsche Bank v. Federal Deposit Insurance Corporation, supra note 42 (‘‘Each Mortgage Loan at origination complied in all material respects with applicable local, state and federal laws, including, without limitation, predatory and abusive lending, usury, equal credit opportunity, real estate settlement procedures, truth-in-lending and disclosure laws, and consummation of the transactions contemplated hereby, including without limitation the receipt of 

interest does not involve the violation of any such laws.’’). 65See Deutsche Bank v. Federal Deposit Insurance Corporation, supra note 42. 66For examples of representations and warranties, see New Century Home Equity Loan Trust, 

Form 8–K for the Period Ending February 16, 2005, at Ex. 99.2 (Mar. 11, 2005) (online at 

www.secinfo.com/dqTm6.zEy.a.htm#hm88). 67See, e.g., Citigroup, Inc., Form 10–K for the Fiscal Year Ended December 31, 2009, at 131 

(Feb. 26, 2010) (online at www.sec.gov/Archives/edgar/data/831001/000120677410000406/ 

citi_10k.htm) (hereinafter ‘‘Citigroup Form 10–K’’). However, since every deal is different, there 

are a number of different methods for extinguishing a repurchase claim that may not necessarily 

require the actual repurchasing of the loan. Industry experts conversations with Panel staff 

(Nov. 9, 2010). 68See Citigroup Form 10–K, supra note 67, at 131. 

loan,62 underwriting standards,63 compliance with applicable law,64

and delivery of mortgage files,65 among other things.66 In addition, 

the mortgage files must contain specific loan and mortgage documents and notification of material breaches of any representations 

and warranties. 

If any of the representations or warranties are breached, and the 

breach materially and adversely affects the value of a loan, which 

can be as simple as reducing its market value, the offending loan 

is to be ‘‘put-back’’ to the sponsor, meaning that the sponsor is required to repurchase the loan for the outstanding principal balance 

plus any accrued interest.67

If successfully exercised, these put-back clauses have enormous 

value for investors, because they permit the holder of a security 

with (at present) little value to attempt to recoup some of the lost 

value from the originator (or, if the originator is out of business, 

the sponsor or a successor). Put-backs shift credit risk from MBS 

investors to MBS sponsors (typically, as noted above, investment 

banks): the sponsor now has the defective loan on its balance sheet, 

and the trust has cash for the full unpaid principal balance of the 

loan plus accrued interest on its balance sheet.68 This means that 


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69Wells Fargo & Company, Together We’ll Go Far: Wells Fargo & Company Annual Report 

2008, at 127 (2009) (online at www.wellsfargo.com/downloads/pdf/invest_relations/ 

wf2008annualreport.pdf) (‘‘In certain loan sales or securitizations, we provide recourse to the 

buyer whereby we are required to repurchase loans at par value plus accrued interest on the 

occurrence of certain credit-related events within a certain period of time.’’). 70 Compass Point Research & Trading, LLC, Mortgage Repurchases Part II: Private Label 

RMBS Investors Take Aim—Quantifying the Risks (Aug. 17, 2010) (online at api.ning.com/files/ 

fiCVZyzNTkoAzUdzhSWYNuHv33*Ur5ZYBh3S08zo*phy T79SFi0TOpPG7klHe3h8 

RXKKyphNZqqyt ZrXQKbMxv4R3F6fN5dI/ 36431113MortgageFinance 

RepurchasesPrivateLabel08172010.pdf). 71 Amherst Mortgage Insight, PMI in Non-Agency Securitizations, at 4 (July 16, 2010) (‘‘PMI 

companies have become more assertive in rescinding insurance . . . In fact, since early 2009, 

option ARM recoveries have averaged 40%, Alt-A recoveries averaged 45%, prime recoveries 

averaged 58%, and subprime recoveries 67%.’’). 72Securitization trustees do not examine and monitor loan files for representation and warranty violations and generally exercise very little oversight of servicers. Securitization trustees 

are not general fiduciaries; so long as there has not been an event of default for the 

securitization trust, the trustee has narrowly defined contractual duties, and no others. 

Securitization trustees are also paid far too little to fund active monitoring; trustees generally 

receive 1 basis point or less on the outstanding principal balance in the trust. In addition, 

securitization trustees often receive substantial amounts of business from particular sponsors, 

which may provide a disincentive for them to pursue representation and warranty violations vigorously against those parties. See Nixon Peabody LLP, Caught in the Cross-fire: Securitization 

Trustees and Litigation During the Subprime Crisis (Jan. 29, 2010) (online at 

www.nixonpeabody.com/publications_detail3.asp?ID=3131) (discussing the perceived role of the 

trustee in mortgage securities litigation). 73See Section D.2, infra. 74See Section D.2, infra. 

the sponsor may have to increase its risk-based capital and will 

bear the risk of future losses on the loan, while the trust receives 

100 cents on the dollar for the loan.69 Not surprisingly, put-back 

actions are very fact-specific and can be hotly contested.70

Servicers do not often pursue representation and warranties violations. A 2010 study by Amherst Mortgage Securities showed that 

while private mortgage insurers were rescinding coverage on a substantial percentage of the loans they insured because of violations 

of very similar representation and warranties, there was very little 

put-back activity by servicers, even though one would expect relatively similar rates.71 One explanation for the apparent lack of 

servicer put-back activity may be the possibility of servicer conflicts 

of interest. Servicers are often affiliated with securitization sponsors and therefore have disincentives to pursue representation and 

warranty violations. Trustees have disincentives to remove 

servicers because they act as backup servicers and bear the costs 

of servicing if the servicer is terminated from the deal. Finally, investors are poorly situated to monitor servicers. Whereas a 

securitization trustee could gain access to individual loan files—but 

typically do not 72—investors cannot review loan files without substantial collective costs.73 On the other hand, investor lawsuits 

have the potential to be lucrative for lawyers, so it is possible that 

some investor groups may take action despite their limited access 

to information.74

2. Possible Legal Consequences of the Document Irregularities to Various Parties 

In addition to fraud claims, discussed further below, and claims 

arising from whether the loans in the pool met the underwriting 

standards required (which is primarily relevant to investors’ rights 

of put-back and bank liability), the other primary concern arising 

out of document irregularities is the potential failure to convey 


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75Most PSAs are governed by New York trust law and contain provisions that override UCC 

Article 9 provisions on secured transactions. This report does not attempt to describe every possible legal defect that may arise out of the irregularities, particularly given the rapidly developing nature of the problem, but addresses arguments common to the current discussions. In 

addition, the Panel takes no position on whether any of these arguments are valid or likely to 

succeed. 

clear title to the property and ownership of the mortgage and the 

note. 

There are two separate but interrelated forms of conveyance that 

may be implicated by documentation irregularities: conveyance of 

the mortgage and the note, and conveyance of the property securing the mortgage. The foreclosure documentation irregularities affect conveyance of the property: if the foreclosure was not done correctly, the bank or a subsequent buyer may not have clear title to 

the property. But these foreclosure irregularities may also be further compromised by a failure to convey the mortgage and the note 

properly earlier in the process. If, during the securitization process, 

required documentation was incomplete or improper, then ownership of the mortgage may not have been conveyed to the trust. This 

could have implications for the PSA—inasmuch as it would violate 

any requirement that the trust own the mortgages and the notes— 

as well as call into question the holdings of the trust and the collateral underlying the pools under common law, the UCC, and trust 

law.75 The trust in this situation may be unable to enforce the lien 

through foreclosure because only the owner of the mortgage and 

the note has the right to foreclose. If the owner of the mortgage is 

in dispute, no one may be able to foreclose until ownership is clearly established. 

If it is unclear who owns the mortgage, clear title to the property 

itself cannot be conveyed. If, for example, the trust were to enforce 

the lien and foreclose on the property, a buyer could not be sure 

that the purchase of the foreclosed house was proper if the trust 

did not have the right to foreclose on the house in the first place. 

Similarly, if the house is sold, but it is unclear who owns the mortgage and the note and, thus, the debt is not properly discharged 

and the lien released, a subsequent buyer may find that there are 

other claimants to the property. In this way, the consequences of 

foreclosure documentation irregularities converge with the consequences of securitization documentation irregularities: in either 

situation, a subsequent buyer or lender may have unclear rights in 

the property. 

These irregularities may have significant bearing on many of the 

participants in the mortgage securitization process: 

• Parties to Whom a Mortgage and Note Is Transferred— 

If a lien was not ‘‘perfected’’—filed according to appropriate 

procedures—participants in the transfer process may no longer 

have a first-lien interest in the property and may be unable to 

enforce that against third-parties (and, where the property has 

little value, particularly in non-recourse jurisdictions, may not 

be able to recover any money). Similarly, if the notes and mortgages were not properly transferred, then the party that can 

enforce the rights attached to the note and the mortgage— 

right to receive payment and right to foreclose, among others— 

may not be readily identifiable. If a trust does not have proper 


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76The competing claims about MERS can also factor into these issues. If MERS is held not 

to be a valid recording system, then mortgages recorded in the name of MERS may not have 

first priority. Similarly, if MERS does not have standing to foreclose, it could cast into question 

foreclosures done by MERS. 77 It should be noted that while no claims have been made yet based on an alleged breach 

of representations and warranties related to the transfer of title, claims have been made based 

on allegations of poor underwriting and loan pool quality. See Buckingham Research Group, 

Conference Takeaways on Mortgage Repurchase Risk, at 2 (Nov. 4, 2010) (hereinafter ‘‘Buckingham Research Group Conference Takeaways’’). However, there is a possibility that there will 

be put-back demands for breaches of representations and warranties relating to mortgage transfers. 78 Because the REMIC status and avoidance of double taxation (trust level and investor level) 

is so critical to the economics of securitization deals, the PSAs that govern the securitization 

trusts are replete with instructions to servicers and trustees to protect the REMIC status, including provisions requiring that the transfers of the mortgage loans occur within a limited time 

after the trust’s creation. See, e.g., Agreement Among Deutsche Alt-A Securities, Inc., Depositor, 

Wells Fargo Bank, National Association, Master Servicer and Securities Administrator, and 

HSBC Bank USA, National Association, Trustee, Pooling and Servicing Agreement (Sept. 1, 

2006) (online at www.secinfo.com/d13f21.v1B7.d.htm#1stPage). 79 If a significant number of loan transfers failed to comply with governing PSAs, it would 

mean that sizeable losses on mortgages would rest on a handful of large banks, rather than 

being spread among MBS investors. Sometimes the securitization sponsor is indemnified by the 

originator for any losses the sponsor incurs as a result of the breach of representations and warranties. See Id. at section 10.03. This indemnification is only valuable, however, to the extent 

that the originator has sufficient assets to cover the indemnification. Many originators are thinly capitalized and others have ceased operating or filed for bankruptcy. Therefore, in many 

cases, any put-back liability is likely to rest on the securitization sponsors. Although these putback rights sometimes entitle the trust only to the value of the loan less any payments already 

received, plus interest, the value the trust would receive is still greater than the current value 

of many of these loans. As a number of originators and sponsors were acquired by other major 

financial institutions during 2008–2009, put-back liability has become even more focused on a 

relatively small number of systemically important financial institutions. Financial Crisis Inquiry 

Commission, Preliminary Staff Report: Securitization and the Mortgage Crisis, at 13 (Apr. 7, 

2010) (online at www.fcic.gov/reports/pdfs/2010-0407-Preliminary_Staff_Report_- 

_Securitization_and_the_Mortgage_Crisis.pdf) (table showing that five of the top 25 sponsors in 

2007 have since been acquired). Overall, recovery is likely to be determined on a deal-by-deal 

basis. 

ownership to the notes and the mortgage, it is unclear what 

assets are actually in the trust, if any.76

• Sponsors, Servicers, and Trustees—Failure to follow representations and warranties found in PSAs can lead to the removal of servicers or trustees and trigger indemnification 

rights between the parties.77 Failure to record mortgages can 

result in the trust losing its first-lien priority on the property. 

Failure to transfer mortgages and notes properly to the trust 

can affect the holdings of the trust. If transfers were not done 

correctly in the first place and cannot be corrected, there is a 

profound implication for mortgage securitizations: it would 

mean that the improperly transferred loans are not trust assets and MBS are in fact not backed by some or all of the 

mortgages that are supposed to be backing them. This would 

mean that the trusts would have litigation claims against the 

securitization sponsors for refunds of the value given by the 

trusts to the sponsors (or depositors) as part of the 

securitization transaction.78 If successful, in the most extreme 

scenario this would mean that MBS trusts (and thus MBS investors) could receive complete recoveries on all improperly 

transferred mortgages, thereby shifting the losses to the 

securitization sponsors.79 Successful put-backs to these entities 

would require them to hold those loans on their books. Even 

if the mortgage loans are still valid, enforceable obligations, 

the sponsors would (if regulated for capital adequacy) be required to hold capital against the mortgage loans, and might 

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80 As noted above, the servicer does not own the mortgage and the note, but has a contractual 

ability to enforce the legal rights associated with the mortgage and the note. 81The concept of ‘‘bona-fide purchaser for value,’’ which exists in both common and statutory 

law, may protect the later buyer. If the later buyer records an interest in the property and had 

no notice of the competing claim, that interest in the property will be protected. Industry 

sources conversations with Panel staff (Nov. 9, 2010). 82See Section E.1, infra. 83The majority of PSAs were created under the laws of New York state. Under New York 

law, there are four requirements for creating a trust: (1) a designated beneficiary; (2) a designated trustee; (3) property sufficiently identified; and (4) and the delivery of the property to 

the trustee. Joshua Rosner of Graham Fisher, an investment research firm, has noted that there 

may not have always been proper delivery of the property to the trustee. ‘‘In New York it is 

not enough to have an intention to deliver the property to the trust, the property must actually 

be delivered. So, what defines acceptable delivery? The answer appears to lie with the ‘governing 

ital, it might, again, subject them to risks of insolvency and 

threaten the system. • Borrowers/homeowners—Borrowers may have several available causes of action. They may seek to reclaim foreclosed 

properties that have been resold. They may also refuse to pay 

the trustee or servicer on the grounds that these parties do not 

own or legitimately act on behalf of the owner of the mortgage 

or the note.80 In addition, they may defend themselves against 

foreclosure proceedings on the claim that robo-signing irregularities deprived them of due process. • Later Purchasers—Potential home-buyers may be concerned 

that they are unable to determine definitively whether the 

home they wish to purchase was actually conveyed with clear 

title, and may be unwilling to rely on title insurance to protect 

them.81 Financial institutions that may have been interested 

in buying mortgages or mortgage securities may worry that the 

current holder of the mortgage did not actually receive the loan 

through a proper transfer. • Investors—Originators of mortgages destined for mortgage securities execute mortgage loan purchase agreements, incorporated into PSAs, that, as mentioned earlier, make representations and warranties the breach of which can result in putback rights requiring that the mortgage originator repurchase 

defective mortgages. MBS investors may assert claims regarding issues that arose during the origination and securitization 

process. For instance, they may assert that violations of underwriting standards or faulty appraisals were misrepresentations 

and material omissions that violate representations and warranties and may, in some cases where the necessary elements 

are established, raise fraud claims.82 They may also raise 

issues about the validity of the REMIC, the bankruptcy-remote, tax-exempt conduit that is central to the mortgage 

securitization process. A potential investor claim is that mortgage origination violations and title defects prevented a ‘‘true 

sale’’ of the mortgages, consistent with Internal Revenue Service (IRS) regulations and as required by the New York State 

trust law, invalidating the REMIC. Some commentators believe 

that inquiries by investors could uncover untimely attempts to 

cure the problem by substituting complying property more 

than 90 days after formation of the REMIC, a prohibited transaction that could cause loss of REMIC status, resulting in the 

loss of pass-through taxation status and taxation of income to 

the trust and to the investor.83 Loss of REMIC status would 


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instrument,’ the Pooling and Servicing Agreement (PSA). Thus, in order to have proper delivery 

the parties to the PSA must do that which the PSA demands to achieve delivery.’’ Joshua 

Rosner, note to Panel staff (Nov. 8, 2010). To the extent that a PSA requires that property be 

conveyed to the trust within a certain timeframe, such conveyance would be void. N.Y. Estates, 

Powers, and Trusts Law § 7–2.4 (McKinney’s 2006). 84 Although title insurers appear to be poised for potential risk, one observer has noted that 

title insurance lobbyists and trade groups have instead played down the possible effects of these 

legal issues. Christopher Lewis Peterson, professor of law, S.J. Quinney School of Law, University of Utah, conversations with Panel staff (Nov. 8, 2010). Title insurers state that they do not 

presently believe that these legal issues will have much effect. Industry sources conversations 

with Panel staff (Nov. 10, 2010). Professor Peterson suggested that the insurers may earn sufficient remuneration from various fees to offset any potential risk. On the other hand, title insurers could stand to suffer significant losses if some of the matters presently discussed in the market, such as widespread invalidation of MERS, come to pass. It is too soon to say if such events 

are likely, but title insurers would be one of the primary parties damaged by such an action. 85 Christopher Lewis Peterson, professor of law, S.J. Quinney School of Law, University of 

Utah, conversations with Panel staff (Nov. 8, 2010). If the mortgages were created at different 

times, the mortgage created first would take precedence. 

provide substantial grounds for widespread put-backs. Moreover, this type of litigation could be extremely lucrative for the 

lawyers representing the investors. It may be expected that, 

for this type of action, the investors’ counsel would have strong 

incentives to litigate forcefully. • Title Insurance Companies—In the United States, purchasers of real property (i.e., land and/or buildings) typically 

purchase title insurance, which provides a payment to the purchaser if a defect in the title or undisclosed lien is discovered 

after the sale of the property is complete. Given the potential 

legal issues discussed in this section, title insurance companies 

could face an increase in claims in the near future. The threat 

of such issues may also lead insurers to require additional documentation before issuing a policy, increasing the costs associated with buying property.84

• Junior Lien Holders—Second and third liens are not as commonly securitized as first liens; therefore, their holders may 

not face the same direct risk as first lien holders. Junior lien 

holders may, however, face an indirect risk if the rights of the 

first lien holder cannot be properly established. If the property 

securing the lien is sold, all senior liens must be paid first. If 

the senior liens cannot be paid off because it is impossible to 

determine who holds those liens, the junior lien holder may not 

be able to claim any of the proceeds of the sale until the identity of the senior lien holder is settled. On the other hand, document irregularities may offer a windfall for some junior liens. 

If the first mortgage has not been perfected, the first lien holder loses its priority over any other, perfected liens. Therefore, 

if a second lien was properly recorded, it could take priority 

over a first lien that was not properly recorded. The majority 

of second liens, however, were completed using the same system as first liens and therefore face the same potential issues. 

Moreover, many mortgages that were created during the housing boom were created with an 80 percent/20 percent ‘‘piggyback’’ structure in which a first and second lien were created 

simultaneously and using the same system. If neither lien was 

perfected, there may be a question as to which would take priority over the other.85

• Local Actions—Despite the state attorneys’ general national 

approach to investigating document irregularities, there may 


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86 Cincinnati Law Review Paper on Foreclosure, supra note 28, at 1386–1371. 87 Institutional holders of RMBS include pension funds, hedge funds and other asset managers, mutual funds, life insurance companies, and foreign investors. Data provided by Inside 

Mortgage Finance (Nov. 12, 2010). 88See Buckingham Research Group Conference Takeaways, supra note 77, at 2. 89 Also, to the extent that these MBSs have been turned into collateralized debt obligations 

(CDOs), the collateral manager overseeing the CDOs may need to weigh actions that pose conflicts among the tranche holders because of obligations to act in the best interests of all the 

securities classes. Panel staff conversations with industry sources (Nov. 8, 2010). 90Greenwich Fin. Serv. v. Countrywide Fin. Corp., No. 650474/08 (N.Y. Supp. Oct. 7, 2010); 

Footbridge Ltd. Trust and OHP Opportunity Ltd. Trust v. Countrywide Home Loans, Inc., No. 

09 CIV 4050 (S.D.N.Y. Sep. 28, 2010). 91 Based on conversations between Panel staff and the company, RMBS Clearing House claims 

to represent more than 72 percent of the certificate holders of 2,300 mortgage-backed securities, 

be separate state initiatives. Under traditional mortgage recording practices, each time a mortgage is transferred from a 

seller to a buyer, the transfer must be recorded and a fee paid 

to the local government. Although each fee is not large—typically around $30—the fees for the rapid transfers inherent in 

the mortgage securitization process could easily add up to hundreds of dollars per securitization. The MERS system was intended in part to bypass these fees.86 Local jurisdictions, deprived of mortgage recording tax revenue, may file lawsuits 

against originators, servicers, and MERS. 

The primary private litigation in this area is likely to come from 

investors in MBS. These investors are often institutional investors, 

a group that has the resources and expertise to pursue such 

claims.87 A major obstacle to investor lawsuits seeking put-backs 

has been a provision in PSAs that limits private investor action in 

the case of breaches of representations and warranties to certificate 

holders with some minimum percentage of voting rights, often 25 

percent.88 Investors also suffer from a collective-action problem in 

trying to achieve these thresholds, not least because they do not 

know who the other investors are in a particular deal, and many 

investors are reluctant to share information about their holdings. 

Furthermore, the interests of junior and senior tranche holders 

may not be aligned.89

When investors do achieve the collective-action threshold, it is 

only the first step in a complicated process. For example, if the 

trustee declines to declare the servicer in default, then investors 

can either bring suit against the trustee to force it to remove the 

servicer, attempt to remove the trustee (which often requires a 51 

percent voting threshold), or remove the servicer directly (with a 

two-thirds voting threshold). It bears emphasis that the collectiveaction thresholds required vary from deal to deal. Two recent investor lawsuits started with a view to enforce put-back provisions 

resulted in dismissals based on the plaintiffs’ failure to adhere to 

25-percent threshold requirements.90 The practical effect of such 

decisions is that the hurdle of meeting this relatively high threshold of certificate holders can limit investors’ ability to examine the 

documents that would support their claims. 

Recently, however, investors are beginning to take collective action, suggesting that the 25-percent threshold may not be an enormous burden for organized investors. A registry created by RMBS 

Clearing House is providing a confidential data bank whose purpose is to identify and organize certificate holders into groups that 

can meet threshold requirements.91 Using the registry data, a lawVerDate Mar 15 2010 02:17 Dec 02, 2010 Jkt 061835 PO 00000 Frm 00030 Fmt 6602 Sfmt 6602 E:\HR\OC\A835.XXX A835

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more than 50 percent of holders of 900 mortgage-backed securities, and more than 66 percent 

of the holders of 450 mortgage-backed securities representing, in the aggregate, a face amount 

of $500 billion, or approximately one-third of the private label mortgage-backed securities market. One industry participant likened them to a dating site for investors. RMBS Clearing House 

conversations with Panel staff (Oct. 24, 2010). 92See Deutsche Bank v. Federal Deposit Insurance Corporation, supra note 42. 93Gibbs & Bruns represents eight institutional investors who collectively hold more than 25 percent of the voting rights in more than $47 billion in Countrywide mortgage-backed securities 

issued in 115 offerings in 2006 and 2007. On Oct 20, 2010, FRBNY became a signatory to the 

letter. 94 Under the PSA, the trustee is entitled to a satisfactory indemnity prior to allowing such 

a process to continue. The trustee for the securities, Bank of New York, did not find the indemnity offered acceptable and refused to allow the parties to proceed. The various trustees for 

these securities may therefore form an additional barrier between investors and review of the 

loan files. For example, Fannie Mae explains in a prospectus for mortgage-backed securities 

(REMIC certificates) that, ‘‘We are not required, in our capacity as trustee, to risk our funds 

or incur any liability if we do not believe those funds are recoverable or if we do not believe 

adequate indemnity exists against a particular risk.’’ See Federal National Mortgage Association, Single-Family REMIC Prospectus, at 44 (May 1, 2010) (online at www.efanniemae.com/syndicated/documents/mbs/remicpros/SF_FM_May_1_2010.pdf). 95Letter from Gibbs & Bruns LLP on behalf of BlackRock Financial Management, Inc. et al. 

to Countrywide Home Loans Servicing LP, The Bank of New York, and counsel, Re: Holders’ 

Notice to Trustee and Master Servicer (Oct. 18, 2010) (hereinafter ‘‘Letter from Gibbs & Bruns 

LLP to Countrywide’’). The group including FRBNY alleges generally that the loans in the pools 

did not meet the quality required by the PSA and have not been prudently serviced. 96 Jamie Dimon, CEO of JPMorgan Chase, commented during a recent quarterly earnings call 

that litigation costs in foreclosure cases will be so large as to become a cost of doing business 

and that, in anticipation of such suits JPMorgan Chase has raised its reserves by $1.3 billion. 

Transcript provided by SNL Financial (Nov. 3, 2010). See also JPM on Foreclosures, MERS, 

supra note 3. 97 Chuck Noski, chief financial officer for Bank of America, stated during an earnings call for 

the third quarter of 2010: ‘‘This really gets down to a loan-by-loan determination and we have, 

we believe, the resources to deploy against that kind of a review.’’ Bank of America Corporation, 

Q3 2010 Earnings Call Transcript (Oct. 19, 2010) (online at www.morningstar.com/earnings/ 

18372176-bank-of-america-corporation-q3-2010.aspx?pindex=1) (hereinafter ‘‘Bank of America 

Q3 2010 Earnings Call Transcript’’). 98For a discussion of litigation risk, see Section F.2, infra. 

suit has been initiated against JPMorgan Chase and the Federal 

Deposit Insurance Corporation (FDIC),92 both of which have assumed liabilities of failed bank Washington Mutual, seeking to enforce put-backs and document disclosure. Recently, an investor 

group composed of eight institutional investors, including the Federal Reserve Bank of New York (FRBNY), representing more than 

25 percent of the voting rights in certain Countrywide MBSs,93

made a request of securitization trustee Bank of New York to initiate an investigation of the offerings originated by Countrywide 

prior to its acquisition by Bank of America. After Bank of New 

York refused to act,94 the group petitioned Bank of America directly in an effort to review the loan files in the pool.95 Some believe that the difficulty faced by investors in gaining access to the 

loan files that support their claims of contractual breaches and the 

cost of auditing them will make widespread litigation economically 

unrealistic.96 Even as put-back demands from investors are appearing, unless the investors can review loan documents, they lack the 

information to know what level of put-backs should be occurring. 

Moreover, at least one bank CEO has stated that his bank will 

challenge any determination that underwriting standards were not 

met on a loan-by-loan basis, creating further hurdles.97 At present, 

it is unclear what litigation risk these proceedings are likely to 

pose for the banks.98 There is good reason to assume, however, that 

the litigation will attract sophisticated parties interested in the 

deep pockets of the sponsors. 

Given the complexity of the legal issues, the numerous parties 

involved, and the relationships between many of them, it is likely 


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99See Section D.1.b, supra. 100See discussion of collective action thresholds in this section, supra. 101 In its latest filing with the Securities and Exchange Commission (SEC), Citigroup acknowledged that hedge fund Cambridge Place Investment Management, The Charles Schwab Corporation, the Federal Home Loan Bank of Chicago, and the Federal Home Loan Bank of Indianapolis 

have filed actions related to underwriting irregularities in RMBS. See Citigroup, Inc., Form 10– 

Q for the Quarterly Period Ended September 30, 2010, at 204 (Nov. 5, 2010) (online at 

www.sec.gov/Archives/edgar/data/831001/000104746910009274/a2200785z10-q.htm) (hereinafter 

‘‘Citigroup 10–Q for Q2 2010’’). In addition, the hedge fund community has begun coalescing 

around their investments in RMBS, forming a lobbying group called the Mortgage Investors Coalition. See Senate Committee on Banking, Housing, and Urban Affairs, Written Testimony of 

Curtis Glovier, managing director, Fortress Investment Group, Preserving Homeownership: 

Progress Needed To Prevent Foreclosures (July 16, 2009) (online at banking.senate.gov/public/ 

index.cfm?FuseAction=Files.View&FileStore_id=18f542f2-1b61-4486-98d0-c02fc74ea2c5). 102See MERSCORP, Inc., MERS Shareholders (online at www.mersinc.org/about/ 

shareholders.aspx) (accessed Nov. 12, 2010) (‘‘Shareholders played a critical role in the development of MERS. Through their capital support, MERS was able to fund expenses related to development and initial start-up.’’). See also Letter from R.K. Arnold, president and chief executive 

officer, MERSCORP, Inc., to Elizabeth M. Murphy, secretary, Securities and Exchange Commission, Comments on the Commission’s Proposed Rule for Asset-Backed Securities, at Appendix B 

(July 30, 2010) (online at www.sec.gov/comments/s7-08-10/s70810-58.pdf) (attaching as an Appendix letters from both Fannie Mae and Freddie Mac, which include the Fannie Mae statement 

that any litigation will be robust, costly, and lengthy. Nonetheless, 

it is possible that banks may see a financial advantage to delaying 

put-backs through litigation and other procedural hurdles, if only 

to slow the pace at which they must be completed and to keep the 

loans off of their books a little longer. In addition, as discussed 

above, conflicts of interest in the industry may further complicate 

an assessment of litigation risk: Servicers, trustees, sponsors, and 

originators are often affiliated with each other, meaning that each 

has a disincentive to proceed with an action against another lest 

it harm its own bottom line.99 Moreover, there is the possibility 

that those who foresee favorable results from such litigation, and 

who have the resources and stamina for complex litigation (such as 

hedge funds), will purchase affected assets with the intent to participate as plaintiffs, intensifying the legal battle further. TARP recipients, of course, were and are at the center of many of these 

transactions, and predicting all of the possible litigation to which 

they might be subject as a result of the irregularities (known and 

suspected) is virtually impossible. It is not unlikely that, on the 

heels of highly publicized actions initiated by major financial institutions and the increasing likelihood that investors can meet the 

25 percent threshold requirements for filing lawsuits, sophisticated 

institutional investors may become more interested in pursuing litigation or even in investing in MBS in order to position themselves 

for lawsuits.100 Some security holders, such as large endowments 

and pension plans, have fiduciary duties to their own investors that 

may lead them to try and enforce repurchase rights. In addition, 

if investors such as hedge funds that have the resources to support 

protracted litigation initiate lawsuits, that could intensify the legal 

battles that banks will face.101 If litigation based on significant document irregularities is successful, it may throw the large banks 

back into turmoil. 

Similarly, Fannie Mae and Freddie Mac may become embroiled 

in the controversies. Fannie and Freddie have already been actively engaged in efforts to put-back nonconforming loans to the 

originators/sponsors of the loans they guarantee. But they may also 

find themselves on the other side, as targets of litigation. In addition to being embedded in the entire securitization process, they 

are part owners of MERS,102 which is becoming a litigation target. 


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that ‘‘As you are aware, Fannie Mae has been an advocate and strong supporter of the efforts 

of MERS since its formation in 1996. The mission of MERS to streamline the mortgage process 

through paperless initiatives and data standards is clearly in the best interests of the mortgage 

industry, and Fannie Mae supports this mission.’’). 103See Federal National Mortgage Association, Miscellaneous Servicing Policy Changes, at 3 

(Mar. 30, 2010) (Announcement SVC–2010–05) (online at www.efanniemae.com/sf/guides/ssg/ 

annltrs/pdf/2010/svc1005.pdf) (‘‘Effective with foreclosures referred on or after May 1, 2010, 

MERS must not be named as a plaintiff in any foreclosure action, whether judicial or non-judicial, on a mortgage loan owned or securitized by Fannie Mae.’’). 104On November 2, 2010, Fannie Mae and Freddie Mac terminated their relationships with 

a Florida foreclosure attorney David J. Stern, who had processed thousands of evictions on their 

behalf and faces allegations by the Florida Attorney General’s office of improper foreclosure 

practices including false and misleading documents. See Office of Florida Attorney General Bill 

McCollum, Florida Law Firms Subpoenaed Over Foreclosure Filing Practices (Aug. 10, 2010) (online at www.myfloridalegal.com/newsrel.nsf/newsreleases/ 

2BAC1AF2A61BBA398525777B0051BB30); Office of Florida Attorney General Bill McCollum, 

Active Public Consumer-Related Investigation, No. L10–3–1145 (online at 

www.myfloridalegal.com/__85256309005085AB.nsf/0/ 

AD0F010A43782D96852577770067B68D?Open&Highlight=0,david,stern) (accessed Nov. 10, 

2010); Nick Timiraos, Fannie, Freddie Cut Ties to Law Firm, Wall Street Journal (Nov. 3, 2010) 

(online at online.wsj.com/article/SB10001424052748704462704575590342587988742.html) (‘‘A 

spokeswoman for Freddie Mac, Sharon McHale, said it took the rare step on Monday of beginning to remove loan files after an internal review raised ‘concerns about some of the practices 

at the Stern firm. She added that Freddie Mac took possession of its files ‘to protect our interest 

in those loans as well as those of borrowers.’ ’’). 105The Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into 

conservatorship on September 7, 2008, in order to preserve each company’s assets and to restore 

them to sound and solvent condition. Treasury has guaranteed their debts, and FHFA has all 

the powers of the management, board, and shareholders of the GSEs. House Financial Services, 

Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises, Written 

Testimony of Edward J. DeMarco, acting director, Federal Housing Finance Agency, The Future 

of Housing Finance: A Progress Update on the GSEs, at 2 (Sept. 15, 2010) (online at 

financialservices.house.gov/Media/file/hearings/111/DeMarco091510.pdf). One of the questions 

that has arisen is whether there are likely to be differences in the quality of securitization processing for government-sponsored entity (GSE) MBS compared to private-label MBS. Some industry sources believe that the process underlying GSE securitizations is likely to have been more 

rigorous, but it is presently impossible to determine if this is correct, and, accordingly, this report does not attempt to distinguish between GSE and private-label deals. However, if GSE 

securitizations prove to have been done improperly, it might result in additional litigation for 

the GSEs—either as targets, or as the GSEs try to pursue indemnification rights. 

Both Fannie and Freddie have recently ceased allowing MERS to 

bring foreclosure actions.103 Further, Fannie and Freddie used at 

least one of the law firms implicated in the irregularities to handle 

foreclosures.104 Given that these two government-supported firms 

are perceived as the ultimate ‘‘deep pocket,’’ it is likely that interested litigants will attempt to find a way to attach liability to 

them, which, if successful, could further affect the taxpayers.105

3. Additional Considerations 

The participants described above are by no means the only parties affected by these issues. Lenders may be reluctant to make 

new loans on homes that could have title issues. Investors may 

likewise be reluctant to invest in mortgages and MBS that may be 

affected. Uncertainty about the actions that federal and state governments may take to address the documentation issues, how these 

actions will affect investment returns, and concerns that these 

problems may be widespread in the mortgage industry may also 

discourage investors. Until there is more clarity on the legal issues 

surrounding title to affected properties, as well as on the extent of 

any title transfer issues, it may also become more difficult or expensive to get title insurance, an essential part of any real estate 

transaction. In addition, put-backs of mortgages, damages from 

lawsuits, and claims against title companies, mortgage servicers, 

and MBS pooling and securitization firms have the potential to 

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106See Standard & Poor’s Global Credit Portal, Ratings Direct, Mortgage Troubles Continue 

To Weigh On U.S. Banks (Nov. 4, 2010) (online at www2.standardandpoors.com/spf/pdf/events/ 

FITcon11410Article5.pdf) (hereinafter ‘‘Standard & Poor’s on the Impact of Mortgage Troubles 

on U.S. Banks’’) (discussion of best and worst case scenarios). 107 Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails 

Everywhere Else, at 5–6, 174 (2000) (‘‘Formal property titles allowed people to move the fruits 

of their labor from a small range of validation into that of an expanded market.’’). 108The few foreclosed homes where a single bank originated the mortgage, serviced it, held 

it as a whole loan, and processed the foreclosure documents themselves are very unlikely to be 

affected. The effect of the irregularities on other types of loans and homes are, as discussed in 

this report, presently very difficult to predict. 109See, e.g., Agreement Among Deutsche Alt-A Securities, Inc., Depositor, Wells Fargo Bank, 

National Association, Master Servicer and Securities Administrator, and HSBC Bank USA, National Association, Trustee, Pooling and Servicing Agreement (Sept. 1, 2006) (online at 

www.secinfo.com/d13f21.v1B7.d.htm) (‘‘Section 2.03: Repurchase or Substitution of Loans. (a) 

Upon discovery or receipt of notice . . . of a breach by the Seller of any representation, warranty 

or covenant under the Mortgage Loan Purchase Agreement . . . the Trustee shall enforce the 

obligations of the Seller under the Mortgage Loan Purchase Agreement to repurchase such 

Loan’’); Trust Agreement Between GS Mortgage Securities Corp., Depositor, and Deutsche Bank 

National Trust Company, Trustee, Mortgage Pass-Through Certificates Series 2006–FM1 (Apr. 

nies that provide services to the mortgage market either decide to 

exit the market or go bankrupt, and no other companies opt to take 

their place in the current environment, the housing market would 

likely suffer. Even the mere possibility of such losses in the future 

could have a chilling effect on the risk tolerance of these firms, and 

could dim the housing market expectations of prospective home 

buyers and mortgage investors, further reducing housing demand 

and raising the cost of mortgages.106

More generally, however, and as noted below, the efficient functioning of the housing market is highly dependent on the existence 

of clear property rights and a level of trust that various market 

participants have in each other and in the integrity of the market 

system.107 If the current foreclosure irregularities prove to be widespread, they have the potential to undermine trust in the legitimacy of many foreclosures and hence in the legality of title on 

many foreclosed properties.108 In that case, it is possible that buyers will avoid purchasing properties in foreclosure proceedings because they cannot be sure that they are purchasing a clean title. 

Protections in the law, such as those for a bona-fide purchaser for 

value, may not ease their anxiety if they are concerned that they 

will become embroiled in litigation when prior owners appeal foreclosure rulings. These concerns would be likely to continue until 

the situation is resolved, or at least until the legal issues surrounding title to foreclosed properties have been clarified. Those 

buyers who remain will likely face less competition and will offer 

very low bids. Even foreclosed homes that have already been sold 

are at risk, since homes sold before these documentation issues 

came to light cannot be assumed to have a legally provable chain 

of title. These homes will therefore likely be difficult to resell, except at low prices that attract risk-tolerant buyers. 

E. Court Cases and Litigation 

The foreclosure documentation irregularities unquestionably 

show a system riddled with errors. But the question arises: Were 

they merely sloppy mistakes, or were they fraudulent? Differing 

answers to this question may not affect certain remedies available 

to aggrieved parties—put-backs, for example, are available for both 

mistakes and for fraud—but would affect potential damages in a 

lawsuit.109 It is important to note that the various parties who may 


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1, 2006) (online at www.secinfo.com/dRSm6.v1Py.c.htm#1stPage) (‘‘Upon discovery or notice of 

any breach by the Assignor of any representation, warranty, or covenant under this Assignment 

Agreement . . . the Assignee may enforce the Assignor’s obligation hereunder to purchase such 

Mortgage Loan from the Assignee.’’). 110See Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059, 1069 (Fed. Cir. 1998) 

(citing W. Prosser, Law of Torts, §§ 100–05 (3d ed. 1964) and 37 C.J.S. Fraud § 3 (1943)). 111See, e.g., Lynn Y. McKernan, Strict Liability Against Homebuilders for Material Latent Defects: It’s Time, Arizona, Arizona Law Review, Vol. 38, at 373, 382 (Spring 1996) (‘‘Although its 

recovery options are attractive, common law fraud is generally difficult to prove.’’); Teal E. 

Luthy, Assigning Common Law Claims for Fraud, University of Chicago Law Review, Vol. 65, 

at 1001, 1002 (Summer 1998) (‘‘Fraud is a difficult claim to prove’’); Jonathan M. Sobel, A Rose 

May Not Always Be a Rose: Some General Partnership Interests Should Be Deemed Securities 

Under the Federal Securities Acts, Cardozo Law Review, Vol. 15, at 1313, 1318 (Jan. 1994) 

(‘‘Common law fraud is inadequate as a remedy because it is often extremely difficult to prove.’’). 112See Seth Lipner & Lisa A. Catalano, The Tort of Giving Negligent Investment Advice, University of Memphis Law Review, Vol. 39, at 697 n.181 (2009); Jack E. Karns & Jerry G. Hunt, 

Can Portfolio Damages Be Established in a Churning Case Where the Plaintiff’s Account Garners 

a Profit Rather Than a Loss, Oklahoma City University Law Review, Vol. 24, at 214 (1999). 

be able to bring lawsuits may choose different causes of action for 

very similar sets of facts depending on standing and a host of other 

factors. For example, on the same facts, an investor may try to pursue a civil suit alleging violations of representations and warranties relating to underwriting standards in a PSA instead of pursuing a securities fraud case where the burden of proof would be 

higher. Put another way, plaintiffs will pursue as many or as few 

causes of action as they believe serves their purpose, and one case 

does not necessarily preclude another. 

1. Fraud Claims 

a. Common Law Fraud 

Property law is principally a state issue, and the foreclosure 

irregularities first surfaced in depositions filed in state courts. Accordingly, one option for plaintiffs may be to pursue a common law 

fraud claim. The bar for proving common law fraud, however, is 

fairly high. In order to prove common law fraud, the plaintiff must 

establish five elements: (1) That the respondent made a material 

statement; (2) that the statement was false; (3) that the respondent 

made the statement with the intent to deceive the plaintiff; (4) that 

the plaintiff relied on the statement; and (5) that the plaintiff suffered injury as a result of that reliance.110

Traditionally, in order to prove common law fraud under state 

laws, each element detailed above has to be satisfied to the highest 

degree of rigor. Each state’s jurisprudence has somewhat different 

relevant interpretive provisions, and common law fraud is generally perceived as a fairly difficult claim to make.111 In particular, 

the requirement of intent has been very difficult to show, since it 

requires more than simple negligence.112

b. Securities Fraud 

i. Foreclosure Irregularities 

In the wake of the revelations about foreclosure irregularities, a 

number of government agencies have gotten involved. The Securities and Exchange Commission (SEC) is reviewing the mortgage 

securitization process and market participants for possible securities law violations. It has also provided specific disclosure guidance 


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113SEC conversations with Panel staff (Nov. 15, 2010). In addition, the SEC’s Division of Corporation Finance has provided disclosure guidance for the upcoming quarterly reports by affected companies. U.S. Securities and Exchange Commission, Sample Letter Sent to Public Companies on Accounting and Disclosure Issues Related to Potential Risks and Costs Associated With 

Mortgage and Foreclosure-Related Activities or Exposures (Oct. 2010) (online at www.sec.gov/ 

divisions/corpfin/guidance/cfoforeclosure1010.htm) (hereinafter ‘‘Sample SEC Letter on Disclosure Guidelines’’). If the disclosure proves misleading, it could provide the basis for another 

cause of action. 114 17 CFR 240.10b–5. It is important to note that other causes of action are available under 

the Securities Act of 1933 for registered offerings: Under Section 11, a claim may be made for 

a false or misleading statement in the registration statement, and the issuer of the security, 

the special purpose vehicle, underwriters, and auditors will all be subject to potential Section 

11 liability (with the latter two groups having due diligence defenses). With respect to other 

communications made during the registered offering process, misleading statements can give 

rise to Section 12(a)(2) liability. See 15 U.S.C. §§ 77k, 77m. 115See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341–42 (2005). The SEC can bring enforcement claims under a variety of theories, but private litigants typically litigate under Rule 

10b–5. See Scott J. Davis, Symposium: The Going-Private Phenomenon: Would Changes in the 

Rules for Director Selection and Liability Help Public Companies Gain Some of Private Equity’s 

Advantages, University of Chicago Law Review, Vol. 76, at 104 (Winter 2009); Palmer T. 

Heenan, et al., Securities Fraud, American Criminal Law Review, Vol. 47, at 1018 (Spring 2010). 116For an extensive analysis of subprime mortgage-related litigation up to 2008 and potential 

legal issues surrounding such litigation, see Jennifer E. Bethel, Allen Ferrel, and Gang Hu, Law 

and Economics Issues in Subprime Litigation, Harvard Law School John M. Olin Center For 

Law, Economics, and Business Discussion Paper (Mar. 21, 2008) (online at lsr.nellco.org/harvard_olin/612) (hereinafter ‘‘Harvard Law School Discussion Paper on Subprime Litigation’’). A 

list of class action lawsuits filed up to February 28, 2008 is included in Table 1 of the article, 

at 67–69. 117See, e.g., Peter H. Hamner, The Credit Crisis and Subprime Mortgage Litigation: How 

Fraud Without Motive ‘Makes Little Economic Sense’, UPR Business Law Journal, Vol. 1 (2010) 

(online at www.uprblj.com/wp/wp-content/uploads/2010/08/1-UPRBLJ-103-Hamner-PH.pdf). 118 A recent update on subprime and credit crisis-related litigation summarizes a number of 

cases and analyzes why many of them failed (for example, lack of standing and lack of wrongful 

intent). Gibson, Dunn & Crutcher LLP, 2010 Mid-Year Securities Litigation Update (Aug. 9, 

2010) (online at gibsondunn.com/Publications/Pages/SecuritiesLitigation2010MidYearUpdate.aspx#_toc268774214). The update also references a report by NERA Economic Consulting on a decrease in securities law filings since 2009. See National Economic Research Associates, Inc. Trends 2010 Mid-Year Study: Filings Decline as the Wave of Credit Crisis Cases Subsides, Median Settlement at Record High (July 27, 2010) (online at www.nera.com/67_6813.htm). 

to public companies for their quarterly reports.113 Since many of 

the mortgages potentially affected by faulty documentation practices were put into securitization pools, there is an increased potential for lawsuits by investors, including securities law claims. 

In order for MBS investors to state a securities fraud claim 

against investment or commercial bank sponsors under the Securities Exchange Act of 1934’s Rule 10b–5,114 the most common private litigant cause of action, the investors must prove: (1) A material misrepresentation or omission; (2) wrongful intent; (3) connection to the purchase or sale of the security; (4) reliance by the purchaser on the information; (5) economic loss to the plaintiff; and (6) 

causation.115

To be sure, private investor lawsuits have been ongoing since the 

end of 2006 without much success.116 Some argue that securities 

fraud was not at the heart of the financial crisis, and securities 

fraud claims are bound to fail because of the typically extensive 

disclosure on risks associated with these transactions.117 A number 

of judges seem to agree: some important cases ‘‘suggest judicial 

skepticism to claims arising from the mortgage and financial crises.’’ 118 The main hurdle in these securities claims—beyond establishing that the misrepresentations were so material that without 

them the investment would not have been made—is to establish 

‘‘loss causation,’’ i.e., that the misrepresentations caused the investor’s losses directly. Any losses caused by unforeseeable external 

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119See Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 342–43 (2005). 120For a more complete discussion of this theory, see Harvard Law School Discussion Paper 

on Subprime Litigation, supra note 116, at 42–44. 121Financial Crisis Inquiry Commission, Written Testimony of Vicki Beal, senior vice president, Clayton Holdings, Impact of the Financial Crisis—Sacramento, at 2 (Sept. 23, 2010) (online at www.fcic.gov/hearings/pdfs/2010-0923-Beal.pdf) (hereinafter ‘‘Written Testimony of Vicki 

Beal before the FCIC’’). 122 Id. at 2. A sample size of only around 10 percent of the total loans in the pool was low 

by historical standards. In the past, sample sizes were between 50 percent and 100 percent. Financial Crisis Inquiry Commission, Testimony of Keith Johnson, former president, Clayton 

Holdings, Transcript: Impact of the Financial Crisis—Sacramento, at 183 (Sept. 23, 2010) (online at fcic.gov/hearings/pdfs/2010-0923-transcript.pdf) (hereinafter ‘‘Testimony of Keith Johnson 

before the FCIC’’). In his letter to the FCIC after Mr. Johnson’s testimony, the current president 

of Clayton Holdings, Paul T. Bossidy, contested some of Mr. Johnson’s testimony. Calling the 

testimony ‘‘inaccurate,’’ he corrected Mr. Johnson on three points. First, Mr. Johnson testified 

during the hearing about meetings he had had with the rating agencies in which he showed 

them Clayton’s Exception Tracking reports. Mr. Bossidy stated that Clayton had never disclosed 

client data during these meetings and that Clayton had never expressed concerns about the 

securitization process or the ratings being issued. Second, Mr. Bossidy cautioned that the exception tracking data provided to the FCIC was from ‘‘beta’’ reports. These reports contain valid 

client-level data, but are not standardized across clients. Different clients have different standards and guidelines, leading to different exception rates. Thus, the aggregated results do not 

form a meaningful basis for comparison between clients and the data cannot be used to draw 

conclusions. Finally, Mr. Johnson had stated that Clayton examined a number of prospectuses 

to determine if the information from Clayton’s due diligence reports had been included. Mr. 

Bossidy clarified that Clayton was not actively reviewing prospectuses but had begun only in 

2007 in response to specific questions from regulators. Letter from Paul T. Bossidy, president 

and chief executive officer, Clayton Holdings, LLC, to Phil Angelides, chairman, Financial Crisis 

Inquiry Commission, Re: September 23, 2010 Sacramento Hearing (Sept. 30, 2010) (online at 

fcic.gov/news/pdfs/2010-1014-Clayton-Letter-to-FCIC.pdf) (hereinafter ‘‘Letter from Paul Bossidy 

to Phil Angelides’’). 

try-specific conditions’’ will not be recoverable.119 Defendants in 

subprime litigation cases are likely to argue that the crash of the 

housing market, for example, was just such an unexpected new industry-specific condition.120 Losses occurring as a result of the market’s crash would be non-recoverable even if there was a material 

misrepresentation. It remains to be seen how securities fraud cases 

would play out in the context of the current documentation irregularities. 

Of course, the SEC has other tools at its disposal should it choose 

to pursue action against any of the financial institutions involved 

in potential documentation irregularities. For example, if a formal 

SEC investigation finds evidence of wrongdoing, the SEC may 

order an administrative hearing to determine responsibility for the 

violation and impose sanctions. Administrative proceedings can 

only be brought against a person or firm registered with the SEC, 

or with respect to a security registered with the SEC. Many times 

these actions end with a settlement, but the SEC often seeks to 

publish the settlement terms. 

ii. Due Diligence Firms 

There is also the possibility of distinct claims against the institutions that acted as securitization sponsors for their use of thirdparty due diligence firms. Specifically, before purchasing a pool of 

loans to securitize, the securitization sponsors, usually banks or investment firms, hired a third-party due diligence firm to check if 

the loans in the pool adhered to the seller’s underwriting guidelines 

and complied with federal, state, and local regulatory laws.121 The 

sponsor would select a sample of the total loan pool, typically 

around 10 percent,122 for the due diligence firm to review. The due 

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123This description is just a summary. For a more complete description of one due diligence 

firm’s process, see Financial Crisis Inquiry Commission, Testimony of Vicki Beal, senior vice 

president, Clayton Holdings, Transcript: Impact of the Financial Crisis—Sacramento, at 156– 

158 (Sept. 23, 2010) (online at fcic.gov/hearings/pdfs/2010-0923-transcript.pdf) (hereinafter ‘‘Testimony of Vicki Beal before the FCIC’’). 124Financial Crisis Inquiry Commission, All Clayton Trending Reports: 1st Quarter 2006— 

2nd Quarter 2007, Impact of the Financial Crisis—Sacramento (Sept. 23, 2010) (online at 

www.fcic.gov/hearings/pdfs/2010-0923-Clayton-All-Trending-Report.pdf). Eighteen percent of 

sampled loans did not meet guidelines but had compensating factors. Eleven percent of loans 

were non-compliant loans, but objections were waived. Seventeen percent of the loans in the 

sample were rejected. In his letter to the FCIC noted above, Mr. Bossidy cautioned the FCIC 

from relying on aggregated exception information. The exception tracking data provided to the 

FCIC was from ‘‘beta’’ reports which contain valid client-level data, but are not standardized 

across clients. Different clients use different standards and guidelines, leading to different exception rates. Letter from Paul Bossidy to Phil Angelides, supra note 122. 125Testimony of Keith Johnson before the FCIC, supra note 122, at 177–78; Testimony of 

Vicki Beal before the FCIC, supra note 123, at 177. 126Testimony of Keith Johnson before the FCIC, supra note 122, at 183, 210–211. 127Written Testimony of Vicki Beal before the FCIC, supra note 121, at 3. 128 17 CFR 240.10b5. 129 17 CFR 240.10b5. 130Written Testimony of Vicki Beal before the FCIC, supra note 121, at 3 (‘‘The work product 

produced by Clayton is comprised of reports that include loan-level data reports and loan exception reports. Such reports are ‘works for hire,’ the property of our clients and provided exclusively to our clients.’’). 131 15 U.S.C. § 77q(a). 

lines but having compensating factors, or meeting the guidelines. 

Those specific loans that did not meet the guidelines, called exceptions, were returned to the sellers unless the securitization sponsors waived their objections.123 One due diligence firm found that, 

from the first quarter 2006 to second quarter 2007, only 54 percent 

of the loans they sampled met all underwriting guidelines.124

Rejected loans from the sample were returned to the seller. The 

sample, though, was only approximately 10 percent of the loans in 

the pool, and the low rate of compliance indicated that there were 

likely other non-compliant loans in the pool. The securitization 

sponsors did not then require due diligence on a larger sample to 

identify non-compliant loans.125 Instead, some assert that the sponsors used the rate of non-compliant loans to negotiate a lower price 

for the pool of loans.126 These loan pools were subsequently sold to 

investors but, reports claim, the results of the due diligence were 

not disclosed in the prospectuses except for standard language that 

there might be underwriting exceptions.127

This behavior raises at least two potential securities fraud 

claims. The first is a Rule 10b–5 violation.128 Rule 10b–5 prohibits 

‘‘omit[ting] to state any material fact necessary to make the statements made, in the light of the circumstances under which they 

were made, not misleading.’’ 129 If the sponsors used the due diligence reports to negotiate a lower price, the information may have 

been material. In addition, the reports were not publicly available.130 On the other hand, the courts may find the standard disclosures, that there might be underwriting exceptions, to be sufficient disclosure. As yet, the 10b–5 claim is untested in the courts, 

and the facts are still unproven. 

Another potential claim is based on Section 17 of the Securities 

Act of 1933, which makes it unlawful in the ‘‘offer or sale of any 

securities . . . to obtain money or property by means of any untrue 

statement of a material fact or any omission to state a material 

fact necessary in order to make the statements made, in light of 

the circumstances under which they were made, not misleading.’’ 131 This claim also depends on unproved facts, but if the 


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132Gretchen Morgenson, Raters Ignored Proof of Unsafe Loans, Panel is Told, The New York 

Times (Sept. 26, 2010) (online at www.nytimes.com/2010/09/27/business/ 

27ratings.html?pagewanted=all); Gretchen Morgenson, Seeing vs. Doing, The New York Times 

(July 24, 2010) (online at www.nytimes.com/2010/07/25/business/25gret.html?ref=fair_game). 133 Congressional Oversight Panel, Testimony of Guy Cecala, chief executive officer and publisher, Inside Mortgage Finance Publications, Inc., Transcript: COP Hearing on TARP Foreclosure Mitigation Programs (Oct. 27, 2010) (publication forthcoming) (online at cop.senate.gov/ 

hearings/library/hearing-102710-foreclosure.cfm) (hereinafter ‘‘Testimony of Guy Cecala’’). 134 Consumer lawyers conversations with Panel staff (Nov. 9, 2010). Several state class actions 

have been filed alleging wrongful foreclosures and fraud on the court, see, e.g., Defendant William Timothy Stacy’s Answer, Affirmative Defenses and Individual and Class Action Counterclaims, Wells Fargo Bank NA, as Trustee for National City Mortgage Loan Trust 2005–1, Mortgage-Backed Certificates, Series 2005–1 vs. William Timothy Stacy, et al., No. 08–CI–120 (Commonwealth of Kentucky Bourbon Circuit Court Division 1 Oct. 4, 2010) See also Class Action 

Complaint, Geoffrey Huber, Beatriz D’Amico-Souza, and Michael and Tina Unsworth, for themselves and all persons similarly situated v. GMAC, LLC, n/k/a Ally Financial, Inc., No. 8:10- 

cv-02458–SCB–EAJ (United States District Court Middle District of Florida Tampa Division 

Nov. 4, 2010). 135 Consumer lawyers conversations with Panel staff (Nov. 9, 2010). 136 50 States Sign Mortgage Foreclosure Joint Statement, supra note 26. 

securitization sponsors used the due diligence reports to negotiate 

a lower price for the loan pools, the information is arguably material. As such, the sponsors may have violated Section 17 when they 

omitted the results of the due diligence reports from the 

prospectuses, though the proposition has not yet been ruled on by 

a court. Section 17, however, can only be enforced by the SEC, and 

not by private litigants. 

There are suggestions in the press that authorities are examining the issue, with several news reports referencing discussions 

with investigators or prosecutors.132

2. Existing and Pending Claims under Various Fraud Theories 

Currently, these issues are being explored at the state level and, 

as discussed above, the private investor level. The recent disclosures about robo-signing may provide additional causes of action 

and additional arguments for private lawsuits asking for put-backs 

of deficient loans. In response to a question at the Panel’s most recent hearing on housing issues, however, one of the witnesses indicated that he was not aware of any successful put-backs for foreclosure procedure problems alone.133 According to some consumer 

lawyers who are significantly involved in these proceedings, while 

it is very unlikely that a national class action lawsuit based on 

wrongful foreclosure claims could be successfully filed, it may be 

possible on a state-by-state basis.134 The outcome in these cases is 

uncertain, and consumer lawyers said that at this point it would 

be difficult to quantify potential losses arising out of these actions 

or any similar challenges in individual foreclosure procedures.135

Various states are proceeding under a variety of theories. As 

noted above, on October 13, 2010, all 50 state attorneys general, as 

well as state bank and mortgage regulators, announced that they 

would pursue a ‘‘bi-partisan multistate group’’ to investigate foreclosure irregularities.136 They are working together to investigate 

allegations of questionable and potentially fraudulent foreclosure 

documentation practices, and may design rules to improve foreclosure practices. They also may begin individual actions against 

some of the implicated institutions. On October 6, 2010, Ohio Attorney General Richard Cordray filed a suit against GMAC Mortgage and its parent Ally Financial, alleging that the companies 


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137 Complaint, State of Ohio ex rel. Richard Cordray v. GMAC Mortgage, CI0201006984 (Lucas 

Cnty Ohio Ct. Common Pleas Oct. 6, 2010) (online at www.ohioattorneygeneral.gov/ 

GMACLawsuit). The complaint also named Jeffrey Stephan as a defendant. It was Jeffrey 

Stephan’s testimony in a Maine foreclosure case that he signed thousands of affidavits without 

verifying their content that ignited the foreclosure documentation scandal. 138 Ally Financial, Inc., GMAC Mortgage Statement on Ohio Lawsuit (Oct. 6, 2010) (online at 

media.ally.com/index.php?s=43&item=420). 139The Ohio attorney general argues that the statements in the foreclosure affidavits were 

material and false, and the employees making them were aware that they were false and were 

making them anyway to induce Ohio courts and opposing parties to rely upon them, which, in 

turn, justifiably did so. He further argues that Ally and GMAC financially benefitted from these 

fraudulent practices by completing foreclosures that should not have been allowed to proceed, 

and the ‘‘system of justice in Ohio and Ohio borrowers have suffered and are suffering irreparable injury.’’ The Ohio attorney general also argues that Ally and GMAC ‘‘engaged in a pattern and practice of unfair, deceptive and unconscionable acts’’ in violation of the Ohio Consumer Sales Practices Act when their employees signed false affidavits and when they attempted to assign mortgage notes on behalf of MERS. Complaint, State of Ohio ex rel. Richard 

Cordray v. GMAC Mortgage, CI0201006984 (Lucas Cnty Ohio Ct. Common Pleas Oct. 6, 2010) 

(online at www.ohioattorneygeneral.gov/GMACLawsuit). 140See Section E.3. 141See, e.g., Deposition of Xee Moua, Wells Fargo Bank v. John P. Stipek, No. 50 2009 CA 

012434XXXXMB AW (Fla. 15th Cir. Ct. Mar. 9, 2010). 142 Congressional Oversight Panel, Written Testimony of Phyllis Caldwell, chief of the Homeownership Preservation Office, U.S. Department of the Treasury, COP Hearing on TARP Foreclosure Mitigation Programs, at 13 (Oct. 27, 2010) (online at cop.senate.gov/documents/testimony-102710-caldwell.pdf) (hereinafter ‘‘Written Testimony of Phyllis Caldwell’’). In addition to 

committed common law fraud and violated the Ohio Consumer 

Sales Practices Act.137 In response, GMAC referred to the irregularities as ‘‘procedural mistakes’’ and maintained that it would defend itself ‘‘vigorously.’’ 138 The Ohio state attorney general alleges 

that ‘‘GMAC and its employees committed fraud on Ohio consumers and Ohio courts by signing and filing hundreds of false affidavits in foreclosure cases.’’ He argues that the defendants’ actions 

were both against the Ohio Consumer Sales Practices Act and constituted common law fraud.139 The attorney general has asked the 

court to halt affected foreclosures until defendants remedy their 

faulty practices and to require them to submit written procedures 

to the attorney general and the court to ensure that no employee 

signs documentation without personal knowledge. 

Although Ohio is the first state to take action, it would not be 

surprising if others follow.140 Depositions have been taken in various foreclosure cases around the country that point to questionable 

practices by employees at a number of banks.141 Most of the large 

financial institutions that service mortgages maintain that documentation issues can be fixed relatively easily by re-submitting affidavits where appropriate and that based on their internal reviews 

there is no indication that the mortgage market is severely flawed. 

Many of the banks that temporarily suspended foreclosures have 

now resumed them. However, in their most recent earnings statements, many of these institutions have indicated that they set 

aside additional funds for repurchase reserves and potential litigation costs resulting from the foreclosure documentation irregularities. 

In addition to these potential lawsuits, the Administration’s Financial Fraud Enforcement Task Force (FFETF) is in the early 

stages of an investigation into whether banks and other companies 

that submitted flawed paperwork in state foreclosure proceedings 

may also have violated federal laws. Treasury’s representative informed the Panel that through Treasury’s Financial Crimes Enforcement Network (FinCEN) they are actively participating in the 

work of the FFETF led by the Department of Justice.142 Treasury 


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their participation in FFETF, Treasury is coordinating efforts with other federal agencies and 

regulators, including the Department of Housing and Urban Development (HUD), the Federal 

Housing Administration (FHA), the Federal Housing Finance Agency (FHFA), the Federal Reserve System, the Office of Thrift Supervision (OTS), the Office of the Comptroller of the Currency (OCC), the FDIC, the Federal Trade Commission (FTC), and the SEC. 143 Congressional Oversight Panel, Testimony of Phyllis Caldwell, chief of the Homeownership 

Preservation Office, U.S. Department of the Treasury, Transcript: COP Hearing on TARP Foreclosure Mitigation Programs (Oct. 27, 2010) (publication forthcoming) (online at cop.senate.gov/ 

hearings/library/hearing-102710-foreclosure.cfm) (hereinafter ‘‘Testimony of Phyllis Caldwell’’). 144For example, the federal perjury statute states ‘‘Whoever—(1) having taken an oath before 

a competent tribunal, officer, or person, in any case in which a law of the United States authorizes an oath to be administered, that he will testify, declare, depose, or certify truly, or that 

any written testimony, declaration, deposition, or certificate by him subscribed, is true, willfully 

and contrary to such oath states or subscribes any material matter which he does not believe 

to be true; or (2) in any declaration, certificate, verification, or statement under penalty of perjury as permitted under section 1746 of title 28, United States Code, willfully subscribes as true 

any material matter which he does not believe to be true; is guilty of perjury and shall, except 

as otherwise expressly provided by law, be fined under this title or imprisoned not more than 

five years, or both.’’ 18 U.S.C. § 1621. 145 Black’s Law Dictionary, at 62 (8th ed. 2004). 146 A Florida Law Firm, The Ticktin Law Group, P.A. has taken hundreds of depositions in 

which employees or contractors of various banks admitted to not knowing what they were signing or lying regarding their personal knowledge of information in affidavits. See, e.g., Deposition 

of Ismeta Dumanjic, La Salle Bank NA as Trustee for Washington Mutual Asset-Backed Certificates WMABS Series 2007–HE2 Trust v. Jeanette Attelus, et al., No. CACE 08060378 (Fla. 17th 

Cir. Ct. Dec. 8, 2009). 147For testimony attesting to signing hundreds of affidavits a day, see Deposition of Xee 

Moua, at 28–29, Wells Fargo Bank v. John P. Stipek, No. 50 2009 CA 012434XXXXMB AW (Fla. 

15th Cir. Ct. Mar. 9, 2010); Deposition of Renee Hertzler, at 25, In re: Patricia L. Starr, No. 

09–41903–JBR (D. Mass. Feb. 19, 2010). 148 Bureau of Justice Statistics, Federal Justice Statistics, 2008—Statistical Tables, at Table 

4.1 (Nov. 2008) (online at bjs.ojp.usdoj.gov/content/pub/html/fjsst/2008/tables/fjs08st401.pdf). 

has otherwise indicated that they are not presently engaged in any 

independent investigative efforts.143 To date, little has been disclosed about the investigation. 

3. Other Potential Claims 

Beyond the various fraud claims, there are also several other potential claims. For example, those who signed false affidavits may 

be guilty of perjury. Perjury is the crime of intentionally stating 

any fact the witness knows to be false while under oath, either in 

oral testimony or in a written declaration.144 Though the exact definition varies from state to state, perjury is universally prohibited. 

Affidavits such as the ones involved in the foreclosure irregularities 

are statements made under oath and thus clearly fall within the 

scope of the perjury statutes.145 Moreover, there are reports of 

robo-signers admitting in depositions that they knew they were 

lying when they signed the affidavits.146 As a result, it is possible 

that these individuals at least are guilty of perjury. Even without 

such an explicit admission, it is possible that a court could find 

that a robo-signer was intentionally and knowingly lying by signing 

hundreds of affidavits a day that attested to personal knowledge of 

loan documents.147 It is important to note, however, that perjury 

prosecutions are rare. For example, of the 91,835 federal cases commenced in fiscal year 2008, at most, only 342 charged perjury as 

the most serious offense.148 It is thus possible that robo-signers, 

though potentially guilty, will not be charged. 

By contrast, the state attorneys general are already investigating 

whether foreclosure irregularities such as the use of robo-signers 

violated state unfair or deceptive acts or practices (UDAP) laws. 

Each state has some form of UDAP law, and most generally, they 

prohibit practices in consumer transactions that are deemed to be 


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149Shaun K. Ramey and Jennifer M. Miller, State Attorneys General Strong-Arm Mortgage 

Lenders, 17 Business Torts Journal 1, at 1 (Fall 2009) (online at www.sirote.com/tyfoon/site/ 

members/D/6/E/D/0/7/0/4/3/C/file/S%20Ramey/Ramey-Miller_REPRINT.pdf). 150 Carolyn L. Carter, Consumer Protection in the United States: A 50-State Report on Unfair 

and Deceptive Acts and Practices Statutes (Feb. 2009) (online at www.nclc.org/images/pdf/udap/ 

report_50_states.pdf). 151 50 States Sign Mortgage Foreclosure Joint Statement, supra note 26. 152This list is not a comprehensive list of state actions. States are becoming involved at a 

rapid pace, in a variety of ways, and from a variety of levels. 153 New York State Unified Court System, Attorney Affirmation-Required in Residential Foreclosure Actions (Oct. 20, 2010) (online at www.courts.state.ny.us/attorneys/foreclosures/affirmation.shtml); New York State Unified Court System, Sample Affirmation Document (online at 

www.courts.state.ny.us/attorneys/foreclosures/Affirmation-Foreclosure.pdf) (accessed Nov. 12, 

2010). 154Letter from Edmund G. Brown, Jr., attorney general, State of California, to Steve Stein, 

SVP channel director, Homeownership Preservation and Partnerships, JPMorgan Chase (Sept. 

30, 2010) (online at ag.ca.gov/cms_attachments/press/pdfs/n1996_ jp_morganchase_letter_.pdf). 155Office of California Attorney General Edmund G. Brown, Jr., Brown Calls on Banks to Halt 

Foreclosures In California (Oct. 8, 2010) (online at ag.ca.gov/newsalerts/release.php?id=2000&). 

unfair or deceptive.149 Individual state laws, however, can be as 

broad as generally prohibiting deceptive or unfair conduct or as 

narrow as prohibiting only a discrete list of practices or exempting 

all acts by banks.150 As a result, whether there has been a UDAP 

violation will depend heavily on the particularities of each state’s 

law. The state attorneys general, though, are already examining 

the matter. In announcing their bipartisan multistate group, the 

attorneys general explicitly stated that they ‘‘believe such a process 

[robo-signing] may constitute a deceptive act and/or an unfair practice.’’ 151

4. Other State Legal Steps 

In addition to the Ohio lawsuit described above and the ongoing 

joint investigation, some other state officials have taken concrete 

steps to address the foreclosure irregularities, including but not 

limited to: 152

• In New York, the court system now requires that those initiating residential foreclosure actions must file a new affirmation to 

certify that an appropriate employee has personally reviewed their 

documents and papers filed in the case and confirmed both the factual accuracy of these court filings and the accuracy of the 

notarizations contained therein.153

• In California, a non-judicial foreclosure state, the attorney 

general sent a letter to JPMorgan Chase demanding that the firm 

stop all foreclosures unless it could demonstrate that all foreclosures had been conducted in accordance with California law.154

The attorney general also called on all other lenders to halt foreclosures unless they can demonstrate compliance with California 

law.155

• In Arizona, which is also a non-judicial foreclosure state, the 

attorney general sent letters on October 7, 2010 to several servicers 

implicated in the robo-signing scandals to demand a description of 

their practices and any remedial actions taken to address potential 

paperwork irregularities. The attorney general wrote that if any 

employees or agents used any of the questionable practices in connection with conducting a trustee’s sale or a foreclosure in Arizona, 

such use would likely constitute a violation of the Arizona ConVerDate Mar 15 2010 02:17 Dec 02, 2010 Jkt 061835 PO 00000 Frm 00042 Fmt 6602 Sfmt 6602 E:\HR\OC\A835.XXX A835

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156Letter from Terry Goddard, attorney general, State of Arizona, to mortgage servicers, Re: 

‘‘Robo-Signing’’ of Foreclosure Documents in Arizona (Oct. 7, 2010) (online at www.azag.gov/ 

press_releases/oct/2010/Mortgage%20Loan%20Servicer%20Letter.pdf). 157 Brief for Richard Cordray, Ohio attorney general, as Amici Curiae, US Bank, National Association v. James W. Renfro, No. CV–10–716322 (Cuyahoga Cty Ohio Ct. Common Pleas Oct. 

27, 2010); Office of Ohio Attorney General Richard Cordray, Cordray Outlines Fraud in Cleveland Foreclosure Case (Oct. 27, 2010) (online at www.ohioattorneygeneral.gov/Briefing-Room/ 

News-Releases/October-2010/Cordray-Outlines-Fraud-in-Cleveland-Foreclosure-Ca). 158Letter from Richard Cordray, attorney general, State of Ohio, to Judges, State of Ohio (Oct. 

29, 2010). 159Letter from Richard Cordray, attorney general, State of Ohio, to David Moskowitz, deputy 

general counsel, Wells Fargo (Oct. 29, 2010). 160Office of District of Columbia Attorney General Peter J. Nickles, Statement of Enforcement 

Intent Regarding Deceptive Foreclosure Sale Notices (Oct. 27, 2010) (online at newsroom.dc.gov/ 

show.aspx?agency=occ§ion=2&release= 

20673&year=2010&file=file.aspx%2frelease%2f20673%2fforeclosure%2520statement.pdf). 161MERSCORP, Inc., MERS Response to D.C. Attorney General’s Oct. 28, 2010 Statement of 

Enforcement (Oct. 28, 2010) (online at www.mersinc.org/news/details.aspx?id=250). The statement emphasizes that ‘‘[w]e will take steps to protect the lawful right to foreclose that the borrower contractually agreed to if the borrower defaults on their mortgage loan.’’ The law firm 

K&L Gates has also published a legal analysis critical of the attorney general’s actions. See K&L 

Gates LLP, DC AG Seeks to Stop Home Loan Foreclosures Based on Incomplete Legal Analysis, 

Mortgage Banking & Consumer Financial Products Alert (Nov. 1, 2010) (online at 

www.klgates.com/newsstand/detail.aspx?publication=6737). 162Office of Connecticut Attorney General Richard Blumenthal, Attorney General Investigating 

Defective GMAC/Ally Foreclosure Docs, Demands Halt To Its CT Foreclosures (Sept. 27, 2010) 

(online at www.ct.gov/ag/cwp/view.asp?A=2341&Q=466312). 163Office of Connecticut Attorney General Richard Blumenthal, Attorney General Asks CT 

Courts To Freeze Home Foreclosures 60 Days Because of Defective Docs (Oct. 1, 2010) 

(www.ct.gov/ag/cwp/view.asp?A=2341&Q=466548). 164Letter from Judge Barbara M. Quinn, chief court administrator, State of Connecticut Judicial Branch, to Richard Blumenthal, attorney general, State of Connecticut (Oct. 14, 2010). 

sumer Fraud Act, and the attorney general would have to take appropriate action.156

• In Ohio, in addition to his lawsuit against GMAC, the attorney general filed an amicus curiae brief in an individual foreclosure 

case asking the court to consider evidence that GMAC committed 

fraud that tainted the entire judicial process and to consider sanctioning GMAC.157 The attorney general also sent a letter to 133 

Ohio judges asking them for information on any cases involving the 

robo-signer Xee Moua.158 In addition, he asked Wells Fargo Bank 

to vacate any foreclosure judgments in Ohio based on documents 

that were signed by robo-signers and to stop the sales of repossessed properties.159

• In The District of Columbia, Attorney General Peter Nickles 

announced on October 27, 2010 that foreclosures cannot proceed in 

the District of Columbia unless a mortgage deed and all assignments of the deed are recorded in public land records, and that 

foreclosures relying on MERS would not satisfy the requirement.160

MERS responded the next day by issuing a statement that their 

procedures conform to the laws of the District of Columbia and encouraged their members to contact them if they experience problems with their foreclosures.161

• In Connecticut, the attorney general started investigating 

GMAC/Ally and demanded that the company halt all foreclosures. 

He also asked the company to provide specific information relating 

to its foreclosure practices.162 In addition, the attorney general 

asked the state Judicial Department on October 1, 2010 to freeze 

all home foreclosures for 60 days to allow time to institute measures to assure the integrity of document filings.163 The Judicial Department refused this request.164


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165See, e.g., Federal National Mortgage Assoc. v. Nicolle Bradbury, supra note 12 (requiring 

that the plaintiff provide, among other things, the book and page number of the mortgage, as 

well as the street address and stating that failure to provide a street address is sufficient to 

preclude summary judgment in a foreclosure proceeding). 166See Section C, supra, discussing strains on servicers. 167Deposition of Tammie Lou Kapusta, In re: Investigation of Law Offices of David J. Stern, 

P.A. (Sept. 22, 2010). 168Federal National Mortgage Association, Foreclosure Time Frames and Compensatory Fees 

for Breach of Servicing Obligations, at 3 (Aug. 31, 2010) (Announcement SVC–2010–12) (online 

at www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/svc1012.pdf) (stating that Fannie Mae 

might pursue compensatory fees based on ‘‘the length of the delay, and any additional costs that 

are directly attributable to the delay.’’). 

5. Other Possible Implications: Potential ‘‘Front-End’’ Fraud 

and Documentation Irregularities 

Until the full scope of the problem is determined, it will be difficult to assess whether banks, servicers, or borrowers knew of the 

irregularities in the market. However, there are several signs that 

the problem was at least partially foreseeable. For example, numerous systems had been developed to circumvent the slow, paperbased property system in the United States. MERS, discussed in 

more detail above, represented an attempt to add speed and simplification to the property registration process, which in turn would 

allow property to be transferred more quickly and easily. MERS 

arose in reaction to a clash: during the boom, originations and 

securitizations moved extremely quickly. But the property law system that governed the underlying collateral moves slowly, and is 

heavily dependent on a variety of steps memorialized on paper and 

thus inefficient at processing enormous lending volume. While systems like MERS appeared to allow the housing market to accelerate, the legal standards underpinning the market did not change 

substantially.165 In some respects, the irregularities and the 

mounting legal problems in the mortgage system seem to be the 

consequence of the banks asking the property law system to do 

something that it may be largely unequipped to do: process millions 

of foreclosures within a relatively short period of time.166 The 

Panel emphasizes that mortgage lenders and securitization 

servicers should not undertake to foreclose on any homeowner unless they are able to do so in full compliance with applicable laws 

and their contractual agreements with the homeowner. If legal uncertainty remains, foreclosure should cease with respect to that 

homeowner until all matters are objectively resolved and vetted 

through competent counsel in each applicable jurisdiction. Satisfaction of applicable legal standards and legal certainty is in the best 

interests of homeowners as well as creditors and will enable all 

concerned parties to exercise properly their legal and contractual 

rights and remedies. 

This combination of factors—a demand for speed, the use of systems designed to streamline a legal regime that was viewed as outof-date, and a slow, localized legal system—may have substantially 

increased the likelihood that documentation would be insufficient. 

As discussed above, some authorities are taking direct aim at 

MERS and the validity of its processes. Coupled with business 

pressure exerted on law firms 167 and contractors 168 to process rapidly foreclosure documents, the system had clear risks of encouraging corner-cutting and creating substantial legal difficulties. Furthermore, even if these problems were not foreseeable from the 


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169See, e.g., Hernando de Soto, Toxic Assets Were Hidden Assets, Wall Street Journal (Mar. 

25, 2009) (online at online.wsj.com/article/SB123793811398132049.html) (‘‘The real villain is the 

lack of trust in the paper on which [subprime mortgages]—and all other assets—are printed. 

If we don’t restore trust in paper, the next default—on credit cards or student loans—will trigger another collapse in paper and bring the world economy to its knees.’’). 170Federal National Mortgage Assoc. v. Nicolle Bradbury, supra note 12 (‘‘The Court is particularly troubled by the fact that Stephan’s deposition in this case is not the first time that 

GMAC’s high-volume and careless approach to affidavit signing has been exposed. . . . The experience of this case reveals that, despite the Florida Court’s order, GMAC’s flagrant disregard 

apparently persists. It is well past time for such practices to end.’’). See also Section C, supra. 

It is worth noting that the rights of a bona-fide purchaser for value are affected by whether 

the purchaser had notice of a competing claim at the time of purchase. One possible source of 

conflict will be what, under these circumstances, constitutes adequate notice. Panel staff conversations with industry sources (Nov. 9, 2010). 171For example, in her testimony submitted to the Congressional Oversight Panel, Julia Gordon of the Center for Responsible Lending writes: ‘‘The recent media revelations about ‘‘robosigning’’ highlight just one of the many ways in which servicers or their contractors elevate profits over customer service or duties to their clients, the investors. Other abuses include 

misapplying payments, force-placing insurance improperly, disregarding requirements to evaluate homeowners for nonforeclosure options, and fabricating documents related to the mortgage’s 

ownership or account status.’’ See Congressional Oversight Panel, Written Testimony of Julia 

Gordon, senior policy counsel, Center for Responsible Lending, COP Hearing on TARP Foreclosure Mitigation Programs, at 3 (Oct. 27, 2010) (online at cop.senate.gov/documents/testimony102710-gordon.pdf) (hereinafter ‘‘Written Testimony of Julia Gordon’’). 

vantage point of the housing boom, the downturn in the housing 

market and the foreclosure crisis made them much more likely. In 

2008 and 2009, a vast amount of attention was given to the difficulty of determining liability in the securitization market because 

of problems with documentation and transparency.169 At this time, 

servicers could have had notice of the types of documentation problems that could affect the transfer of mortgage ownership. In some 

cases, even when servicers were explicitly made aware of the shoddy documentation, they did little to correct the problem. One judge 

determined that ‘‘[r]ather than being an isolated or inadvertent instance of misconduct . . . GMAC has persisted in its unlawful document signing practices’’ even after it was ordered to correct its 

practices.170

Some observers argue that current irregularities were not only 

foreseeable, but that they mask a range of potential irregularities 

at the stage in which the mortgages were originated and pooled. 

According to that view, current practices simply added to and magnified problems with the prior practices. The legal consequences of 

foreclosure irregularities will be magnified if the problems also 

plagued originations: after all, foreclosures are still a relatively limited portion of the market. If all securitizations or performing 

whole loans were to be affected, the consequences could be significantly greater. At this point, answers as to what exactly is the 

source of the problems at the front end and how severe the consequences may be going forward depend to a large degree on who 

is evaluating the problem. The Panel describes below the perspectives of various stakeholders in the residential mortgage market. 

a. Academics and Advocates for Homeowners 

Many lawyers and stakeholders who have worked with borrowers 

and servicers on a regular basis over the past few years, primarily 

in bankruptcy and foreclosure cases, maintain that documentation 

problems, including potentially fraudulent practices, have been pervasive and apparent.171 These actors, including academics who 

study the topic, argue that bankruptcy and foreclosure procedures 

have been revealing major deficiencies in mortgage servicing and 


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172Written Testimony of Katherine Porter, supra note 14, at 9 (referencing her paper: Katherine M. Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, Texas Law Review, 

Vol. 87 (2008) (Nov. 2008) (online at www.mortgagestudy.org/files/Misbehavior.pdf)). The paper 

gives an in-depth analysis of how mortgage servicers frequently do not comply with bankruptcy 

law. 173Written Testimony of Julia Gordon, supra note 171, at 11. 174Legalprise Inc., Report on Lost Note Affidavits in Broward County, Florida (Oct. 2010). 

Legalprise is a Florida legal research firm that uses and analyzes public foreclosure court 

records. 175Written Testimony of Katherine Porter, supra note 14, at 9. 176 Consumer lawyers conversations with Panel staff (Oct. 28, 2010). 177 Consumer lawyers conversations with Panel staff (Nov. 9, 2010). 

documentation for quite some time. Professor Katherine M. Porter, 

a professor of law who testified at the Panel’s most recent hearing, 

wrote: ‘‘The robo-signing scandal should not have been a surprise 

to anyone; these problems were being raised in litigation for years 

now. Similarly, I released a study in 2007—three years ago—that 

showed that mortgage companies who filed claims to be paid in 

bankruptcy cases of homeowners did not attach a copy of the note 

to 40% of their claims.’’ 172 According to this view, the servicing 

process was severely flawed, and ‘‘servicers falsify court documents 

not just to save time and money, but because they simply have not 

kept the accurate records of ownership, payments, and escrow accounts that would enable them to proceed legally.’’ 173 In 2008– 

2009 over 1,700 lost note affidavits were filed in Broward County, 

Florida alone.174 These affidavits claim that the original note has 

been lost or destroyed and cannot be produced in court. It is important to recognize, however, that a lost note affidavit may not actually mean that the note has been lost. In her written testimony to 

the Panel, Professor Katherine Porter points out that her study of 

lost notes in bankruptcies ‘‘does not prove . . . whether the mortgage companies have a copy of the note and refused to produce it 

to stymie the consumers’ rights or to cut costs, whether the mortgage companies or their predecessors in a securitization lost the 

note, or whether someone other than the mortgage company is the 

holder/bearer of the note.’’ 175

If the lawyers’ and advocates’ assertions of widespread irregularities are correct, it could mean that potentially millions of shoddily 

documented mortgages have been pooled improperly into 

securitization trusts. Lawyers are using a lack of standing by the 

servicers due to ineffective conveyance of ownership of the mortgage as a defense in foreclosure cases. Some of these lawyers argue 

that the disconnect between what was happening on the ‘‘street 

level,’’ i.e., with the origination and documentation of mortgages, 

and the transfer requirements in the PSAs, is so huge that no credence can be given to the banks’ argument that the issues are 

merely technical.176 However, commentators who believe that the 

problem is widespread also believe that investors in these 

securitization pools, rather than homeowners, may be the best 

placed to pursue the cases on a larger scale successfully.177

b. Servicers and Banks 

Since the foreclosure irregularities have surfaced, the banks involved have maintained that the problems are largely procedural 

and technical in nature. Banks have temporarily suspended foreclosures in judicial foreclosure states in particular and looked into 


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178 Bank of America Q3 2010 Earnings Call Transcript, supra note 97, at 6. 179 Bank of America Q3 2010 Earnings Call Transcript, supra note 97, at 6. 180 JPMorgan Chase & Co., Financial Results 3Q10, at 15 (Oct. 13, 2010) (online at 

files.shareholder.com/downloads/ONE/1051047839x0x409164/e27f1d82-ef74-429e-8ff1- 

7d6706634621/3Q10_Earnings_Presentation.pdf) (hereinafter ‘‘JPMorgan Q3 2010 Financial Results’’) (‘‘Based on our processes and reviews to date, we believe underlying foreclosure decisions 

were justified by the facts and circumstances.’’); Wells Fargo Update on Affidavits and Mortgage 

Securitizations, supra note 23 (‘‘The issues the company has identified do not relate in any way 

to the quality of the customer and loan data; nor does the company believe that any of these 

instances led to foreclosures which should not have otherwise occurred.’’). 181For example, the American Securitization Forum issued a statement questioning the legitimacy of concerns raised about securitization practices: ‘‘In the last few days, concerns have 

been raised as to whether the standard industry methods of transferring ownership of residential mortgage loans to securitization trusts are sufficient and appropriate. These concerns are 

without merit and our membership is confident that these methods of transfer are sound and 

based on a well-established body of law governing a multi-trillion dollar secondary mortgage 

market.’’ See American Securitization Forum, ASF Says Mortgage Securitization Legal Structures & Loan Transfers Are Sound (Oct. 15, 2010) (online at www.americansecuritization.com/ 

story.aspx?id=4457) (hereinafter ‘‘ASF Statement on Mortgage Securitization Legal Structures 

and Loan Transfers’’). ASF will issue a white paper in the coming weeks to elaborate further 

on this statement. 182See Letter from Gibbs & Bruns LLP to Countrywide, supra note 95. As noted above, the 

letter predominantly alleges problems with loan quality and violation of prudent servicing obligations. See also Gibbs & Bruns LLP, Institutional Holders of Countrywide-Issued RMBS Issue 

Notice of Non-Performance Identifying Alleged Failures by Master Servicer to Perform Covenants 

and Agreements in More Than $47 Billion of Countrywide-Issued RMBS (Oct. 18, 2010) (online 

Continued 

their practices, but they state that they do not view these problems 

as fundamental either in the foreclosure area or in the origination 

and pooling of mortgages. The CEO of Bank of America, Brian 

Moynihan, noted in the company’s most recent earnings call that 

Bank of America has resumed foreclosures, but ‘‘it’s going to take 

us three or five weeks to get through and actually get all the judicial states taken care of. The teams reviewing data have not found 

information which was inaccurate, would affect the frame factors of 

the foreclosure; i.e., the customer’s delinquency, etcetera.’’ 178 He focused on the faulty affidavits and argued that ‘‘[they] fixed the affidavit signing problem or will be fixed in very short order.’’ 179 Many 

of the other large banks have issued statements in the same 

vein.180 Most of these banks have either not commented on the 

issues around the transfer of ownership of the mortgage or maintain that alleged ownership transfer problems are without merit or 

exaggerated.181

c. Investors 

As discussed above, securitization investors have been involved 

in lawsuits regarding underwriting representations and warranties 

for some time. Investors in MBS or collateralized debt obligation 

(CDO) transactions have a variety of options to pursue a claim. 

Claims alleging violations of representations and warranties have 

typically focused on violations of underwriting standards regarding 

the underlying loans pooled into the securities. Another option may 

be to pursue similar claims relating to violations of representations 

and warranties with respect to the transfer of mortgage ownership. 

In the wake of the current documentation controversies, it appears 

that private investors may become more emboldened to pursue putback requests and potentially file lawsuits. For example, and as 

discussed above, a group of investors—including FRBNY in its capacity as owner of RMBS it obtained from American International 

Group, Inc. (AIG)—sent a letter to Bank of America as an initial 

step to be able to demand access to certain loan files.182 Direct conVerDate Mar 15 2010 02:17 Dec 02, 2010 Jkt 061835 PO 00000 Frm 00047 Fmt 6602 Sfmt 6602 E:\HR\OC\A835.XXX A835

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at www.gibbsbruns.com/files/Uploads/Documents/Press_Release_Gibbs%20&%20Bruns%20 _10_18_10.pdf); Gibbs & Bruns LLP, Countrywide RMBS Initiative (Oct. 20, 2010) (online at 

www.gibbsbruns.com/countrywide-rmbs-initiative-10-20-2010/). 183FRBNY staff conversations with Panel staff (Oct. 26, 2010). 184For further discussion of these obstacles, see Section D.2. In addition, see description of 

PSAs in Section D.1, supra. 185For example, the investors taking action have to consider costs associated with their litigation such as indemnifications to be given to trustees when those are directed to initiate a lawsuit on the bondholders’ behalf. Another consideration is that non-participating investors may 

also ultimately benefit from legal actions without contributing to the costs. 186For example, in some PSAs, trustees are not required to investigate any report or, in many 

agreements, request put-backs, unless it is requested by 25 percent of investors. See Pooling and 

Servicing Agreement by and among J.P. Morgan Acceptance Corporation I, Depositor, et al., at 

122 (Apr. 1, 2006) (online at www.scribd.com/doc/31453301/Pooling-Servicing-AgreementJPMAC2006-NC1-PSA). Absent that threshold being met, the trustee has discretion to act. For 

further discussion, see Section D.2. 187 Amherst Securities Group LP, Conference Call: ‘‘Robosigners, MERS, And The Issues With 

Reps and Warrants’’ (Oct. 28, 2010). If the investors wished to act against trustees they believe 

are not independent, there are some legal avenues they could pursue. For example, the investors 

could remove the trustee using provisions that are typically in PSAs that allow for such a removal. Such provisions, however, often require 51 percent of investors to act. In addition, to the 

extent that the trustees are found to be fiduciaries, if the trustee takes a specific action that 

the investors believe not to be in their best interest, they may be able to sue the trustee. If 

successful, investors could be awarded a number of possible remedies, including damages or removal of the trustee. Greenfield, Stein, & Senior, Fiduciary Removal Proceedings (online at 

www.gss-law.com/PracticeAreas/Fiduciary-Removal-Proceedings.asp) (accessed Nov. 12, 2010); 

Gary B. Freidman, Relief Against a Fiduciary: SCPA § 2102 Proceedings, NYSBA Trusts and Estates Law Section Newsletter, at 1–2, 4 (Oct. 13, 2003) (online at www.gss-law.com/CM/Articles/ 

SCPA%202102%20Proceedings%20-%20Revised.pdf) (‘‘The failure of the fiduciary to comply with 

a court order directing that the information be supplied can be a basis for contempt under SCPA 

§ 606, 607–1 and/or suspension or removal of the fiduciary under SCPA § 711.’’). 188There are also risks for holders of second lien loans, but these loans are not as directly 

impacted by foreclosure irregularities as first-lien mortgages, since most second liens were not 

securitized, and are held on the balance sheets of banks and other market participants. As discussed above, if second liens were perfected and first liens were not, they may actually take 

priority. See Section D.2 for further discussion of effects on second lien holders. 

An analyst report from January 2010, values securitized second liens only at $32.5 billion of 

the $1.053 trillion of the total second liens outstanding. Amherst Securities Group LP, Amherst 

Mortgage Insight, 2nd Liens—How Important, at 12 (Jan. 29, 2010). 

tact with the bank was initiated because the securitization trustee 

(Bank of New York) had refused to comply with the initial request 

in accordance with the PSA. FRBNY, as an investor, is on equal 

footing with all the other investors, and according to FRBNY’s representatives, they view this action and any potential participation 

in a future lawsuit as one way to attempt to recover funds for the 

taxpayers.183

While there may be a growing appetite for pursuing such lawsuits, these lawsuits still have to overcome a fair number of obstacles built in to the PSAs,184 as well as problems inherent in any 

legal action that requires joint action by many actors.185 As a general matter, what appears to be a significant problem is that the 

operating documents for these transactions generally give significant discretion to trustees in exercising their powers,186 and these 

third parties may not be truly independent and willing to look out 

for the investors.187

F. Assessing the Potential Impact on Bank Balance Sheets 

1. Introduction 

A bank’s exposure to the current turmoil in the residential real 

estate market stems from its role as the originator of the initial 

mortgage, its role as the issuer of the packaged securities, its role 

as the underwriter of the subsequent mortgage trusts to investors, 

and/or its role as the servicer of the troubled loan.188 Through 


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At the end of the second quarter of 2010, the four largest U.S. commercial banks—Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo—reported $433.7 billion in second lien 

mortgages while having total equity capital of $548.8 billion. Amherst Securities Group LP data 

provided to Panel staff (Sept. 2, 2010); Federal Deposit Insurance Corporation, Statistics of Depository Institutions (online at www2.fdic.gov/sdi/) (accessed Nov. 12, 2010). This figure is based 

on reporting by the banks, not their holding companies, and therefore may not include all second 

liens held by affiliates. 189FBR Foreclosure Mania Conference Call, supra note 3. 190See Section F.2 for further discussion on costs stemming from a foreclosure moratorium. 191 However, to the extent that banks hold MBSs originated/issued by non-affiliates, they may 

themselves benefit from put-backs. 192 Credit Suisse, U.S. Banks: Mortgage Put-back Losses Appear Manageable for the Large 

Banks, at 4 (Oct. 26, 2010) (hereinafter ‘‘Credit Suisse on Mortgage Put-back Losses’’); Deutsche 

Bank, Revisiting Putbacks and Securitizations, at 7 (Nov. 1, 2010) (hereinafter ‘‘Deutsche Bank 

Revisits Putbacks and Securitizations’’); FBR Capital Markets, Repurchase-Related Losses 

Roughly $44B for Industry—Sensationalism Not Warranted (Sept. 20, 2010) (hereinafter ‘‘FBR 

on Repurchase-Related Losses’’); Standard & Poor’s on the Impact of Mortgage Troubles on U.S. 

Banks, supra note 106. 193There are other mortgage risks that are difficult to quantify, such as the potential effect 

mortgage put-backs may have on holders of interests in CDOs and the banks that serve as 

counterparties for synthetic CDOs. A synthetic CDO is a privately negotiated financial instrument that is generally made up of credit default swaps on a referenced pool of fixed-income assets, in these cases often including the mezzanine tranches of RMBSs. Large banks served as 

intermediaries for clients wishing to shift risk and therefore structure a synthetic CDO. These 

banks packaged and underwrote synthetic CDOs and may have retained a certain amount of 

liquidity risk. It is nearly impossible, however, to measure the possible effect of this issue due 

to the fact that there is no reliable data that estimates the size of the CDO market, and the 

Continued 

these various roles in the mortgage market, the banking sector’s 

vulnerability to the current turmoil in the market generally encompasses improper foreclosures, related concerns regarding title documentation, and mortgage repurchase risk owing to breaches in representations and warranties provided to investors. 

Many investment analysts believe that potential costs associated 

with bank foreclosure irregularities are manageable, with potential 

liabilities representing a limited threat to earnings, rather than 

bank capital.189 Market estimates stemming from foreclosure irregularities to a potential prolonged foreclosure moratorium range 

from $1.5 to $10.0 billion for the entire industry.190 However, while 

the situation remains fluid, the emerging consensus in the market 

is that the risk from mortgage put-backs is a potentially bigger 

source of instability for the banks.191 Using calculations based on 

current market estimates of investment analysts, the Panel calculates a consensus exposure for the industry of $52 billion. Aside 

from the potential for costs to far exceed these market estimates 

(or be materially lower), the wild card here is the impact of broader 

title documentation concerns across the broader mortgage market. 

In any case, the fallout from the foreclosure crisis and ongoing putbacks to the banks from mortgage investors are likely to continue 

to weigh on bank earnings, but are, according to industry analysts, 

unlikely to pose a grave threat to bank capital levels.192

However, there are scenarios whereby wholesale title and legal 

documentation problems for the bulk of outstanding mortgages 

could create significant instability in the marketplace, leading to 

potentially significantly larger effects on the balance sheets of 

banks. Under significantly more severe scenarios that would engulf 

the broader mortgage market—encompassing widespread legal uncertainty regarding mortgage loan documentation as well as the 

prospect of extensive put-backs impacting agency and private label 

mortgages—bank capital levels could conceivably come under renewed stress, particularly for the most exposed institutions.193 It 


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fact that counterparty risk in synthetic CDOs is agreed to under a private contract and therefore no data is publicly available. Panel staff conversations with industry sources (Nov. 4, 2010). 

For general information on the counterparty risk involved in synthetic CDOs, see Michael Gibson, Understanding the Risk of Synthetic CDOs (July 2004) (online at www.curacao-law.com/ 

wp-content/uploads/2008/10/federal-reserve-cdo-analysis-2004.pdf). 194 Board of Governors of the Federal Reserve System, The Supervisory Capital Assessment 

Program: Design and Implementation (Apr. 24, 2009) (online at www.federalreserve.gov/ 

newsevents/press/bcreg/bcreg20090424a1.pdf). 195See Section D for a discussion on legal considerations of foreclosure document irregularities. 196 Board of Governors of the Federal Reserve System, Statistics & Historical Data: Mortgage 

Debt Outstanding (Sept. 2010) (online at www.federalreserve.gov/econresdata/releases/ 

mortoutstand/current.htm). 197 Id. 

is unclear whether severe mortgage scenarios were modeled in the 

Federal Reserve’s 2009 stress tests, which, in any event, did not examine potential adverse scenarios beyond 2010.194

While the situation is still uncertain, the worst-case scenarios 

would have to presuppose at a minimum a systemic breakdown in 

documentation standards, the consequences of which would likely 

grind the mortgage market to a halt. However, it is important to 

note that, so far, many of the experts who have spoken to the question (and the banks themselves) believe that securities documentation concerns are unlikely to trigger meaningful broad-based losses. 

These experts state that although put-backs owing to breaches of 

representations and warranties will continue to exert a toll on the 

banks, it will largely be manageable, with costs covered from ongoing reserves and earnings. Furthermore, as noted in Section D, 

there are a considerable number of legal considerations that will 

likely lead to losses being spread out over time.195

Residential U.S. mortgage debt outstanding was $10.6 trillion as 

of June 2010.196 Of this amount, $5.7 trillion is government-spon- sored enterprise (GSE) or agency-backed paper, $1.4 trillion is private label (or non-GSE issued) securities, and $3.5 trillion is nonsecuritized debt held on financial institution balance sheets.197


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198 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: 

Flow of Funds Accounts of the United States: Data Download Program (Instrument: Home Mortgages, Frequency: Annually, L.218) (online at www.federalreserve.gov/datadownload/ 

Choose.aspx?rel=Z.1) (accessed Nov. 12, 2010). 199Mortgage Bankers Association, National Delinquency Survey, Q2 2010 (Aug. 26, 2010) 

(hereinafter ‘‘MBA National Delinquency Survey, Q2 2010’’). See also Mortgage Bankers Association, Delinquencies and Foreclosure Starts Decrease in Latest MBA National Delinquency Survey 

(Aug. 26, 2010) (online at www.mbaa.org/NewsandMedia/PressCenter/73799.htm) (hereinafter 

‘‘MBA Press Release on Delinquencies and Foreclosure Starts’’). 200Delinquency rates include loans that are 30 days, 60 days, and 90 days or more past due. 

Foreclosure rates include loans in the foreclosure process at the end of each quarter. See Id. 

FIGURE 2: RESIDENTIAL (1–4 FAMILY) MORTGAGE DEBT OUTSTANDING, 1985–2009 198

[Dollars in millions] 

Industry-wide, 4.6 percent of mortgages are classified as in the 

foreclosure process. In addition, 9.4 percent of mortgages are at 

least 30 days past due, approximately half of which are more than 

90 days past due.199

FIGURE 3: DELINQUENCY AND FORECLOSURE RATES (2006–2010) 200


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a. Leading Market Participants 

Troubled mortgages were largely originated in 2005–2007, when 

underwriting standards were most suspect, particularly for 

subprime, Alt-A and other loans to low-credit or poorly documented 

borrowers. Figure 4 below outlines the largest mortgage originators 

during this period, ranked by volume and market share. 

FIGURE 4: LARGEST U.S. MORTGAGE ORIGINATORS, 2005–2007 201

[Dollars in billions] 

Company Volume 

Market 

Share 

(Percent) 

Bank of America .............................................................................................................................. 1,880 22.1 

Countrywide Financial ............................................................................................................ 1,362 16.0 

Bank of America Mortgage & Affiliates ................................................................................. 518 6.1 

Wells Fargo ...................................................................................................................................... 1,324 15.5 

Wells Fargo Home Mortgage ................................................................................................... 1,062 12.4 

Wachovia Corporation ............................................................................................................. 262 3.1 

JPMorgan Chase .............................................................................................................................. 1,151 13.5 

Chase Home Finance .............................................................................................................. 566 6.6 

Washington Mutual ................................................................................................................. 584 6.9 

Citigroup .......................................................................................................................................... 506 5.9 

Top Four Aggregate ........................................................................................................................ 4,861 57.0 

Total Mortgage Originations (2005–2007) .................................................................................... 8,530 

201 Inside Mortgage Finance. 

The four largest banks accounted for approximately 60 percent of 

all loan originations between 2005 and 2007. Totals for Bank of 

America, Wells Fargo, JPMorgan Chase, and Citigroup include volumes originated by companies that these firms subsequently acquired. As Figure 4 indicates, a significant portion of Bank of 

America’s mortgage loan portfolio is comprised of loans assumed 

upon its acquisition of Countrywide Financial. Similarly, JPMorgan 

Chase more than doubled its mortgage loan portfolio with its acquisition of Washington Mutual. 

Figure 5, below, details the largest originators of both Alt-A and 

subprime loans between 2005 and 2007. The five leading originators of Alt-A and subprime loans represented approximately 56 percent and 34 percent, respectively, of aggregate issuance volume for 

these loan types. Alt-A and subprime loans represented approximately 30 percent of all mortgages originated from 2005 to 2007. 

FIGURE 5: LEADING ORIGINATORS OF SUBPRIME AND ALT-A LOANS, 2005–2007 202

[Dollars in billions] 

Company Volume 

Market 

Share 

(Percent) 

ALT-A ORIGINATIONS 

Countrywide Financial (Bank of America) ....................................................................................... 172 16.2 

IndyMac ............................................................................................................................................ 145 13.6 

JPMorgan Chase .............................................................................................................................. 102 9.6 

Washington Mutual ................................................................................................................. 40 3.8 

EMC Mortgage ........................................................................................................................ 38 3.5 

Chase Home Financial ............................................................................................................ 25 2.3 

GMAC ............................................................................................................................................... 98 9.2 

GMAC–RFC .............................................................................................................................. 77 7.3 

GMAC Residential Holding ...................................................................................................... 21 1.9 


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FIGURE 5: LEADING ORIGINATORS OF SUBPRIME AND ALT-A LOANS, 2005–2007 202—Continued 

[Dollars in billions] 

Company Volume 

Market 

Share 

(Percent) 

Lehman Brothers 203 ........................................................................................................................ 79 7.4 

Top Five Aggregate ........................................................................................................................ 596 56.0 

Total Alt-A Originations (2005–2007) ............................................................................................ 1,065 

SUBPRIME ORIGINATIONS 

Ameriquest Mortgage ....................................................................................................................... 112 7.7 

New Century ..................................................................................................................................... 109 7.5 

Countrywide Financial (Bank of America) ....................................................................................... 102 7.0 

JPMorgan Chase .............................................................................................................................. 99 6.8 

Washington Mutual ................................................................................................................. 66 4.5 

Chase Home Finance .............................................................................................................. 33 2.3 

Option One Mortgage ....................................................................................................................... 80 5.5 

Top Five Aggregate ........................................................................................................................ 502 34.4 

Total Subprime Origination (2005–2007) ...................................................................................... 1,458 

202 Inside Mortgage Finance. 203 Includes Alt-A originations from Lehman Brothers subsidiary, Aurora Loan Services, LLC. 

As shown in Figure 6, below, the five leading underwriters (pro 

forma for acquisitions) of non-agency MBS between 2005 and 2007 

accounted for 58 percent of the total underwriting volume for the 

period. It is of note that the three firms with the largest underwriting volumes during this period, Lehman Brothers, Bear 

Stearns, and Countrywide Securities, have either failed or been acquired by another company. 

FIGURE 6: LEADING UNDERWRITERS OF NON-AGENCY MORTGAGE-BACKED SECURITIES, 2005– 

2007 204

[Dollars in billions] 

Company Volume 

Market 

Share 

(Percent) 

JPMorgan Chase .............................................................................................................................. 593 19.5 

JPMorgan Chase ..................................................................................................................... 143 4.7 

Bear Stearns ........................................................................................................................... 298 9.8 

Washington Mutual ................................................................................................................. 152 5.0 

Bank of America .............................................................................................................................. 371 12.2 

Merrill Lynch ........................................................................................................................... 94 3.1 

Countrywide Securities ........................................................................................................... 277 9.1 

Lehman Brothers ............................................................................................................................. 322 10.6 

RBS Greenwich Capital ................................................................................................................... 273 9.0 

Credit Suisse ................................................................................................................................... 203 6.7 

Top Five Aggregate ........................................................................................................................ 1,762 58.0 

Total Underwriting Volume (2005–2007) ...................................................................................... 3,044 

204 Inside Mortgage Finance. 

As noted above, banks either retain or securitize—market conditions permitting—the mortgage loans they originate. In terms of 

mortgages retained on bank balance sheets, Figure 7 below lists 

banks with the largest mortgage loan books, as well as the concentration of foreclosed mortgage loans, ranked by volume and as 

a percentage of overall residential mortgage balance sheet assets. 


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207 Bank of America is frequently mentioned by analysts as having potentially high exposure, 

in part because of its purchase of Countrywide Financial and Merrill Lynch, which was heavily 

involved in CDOs, and its assumption of successor liability. During the Panel’s October 27, 2010 

hearing, Guy Cecala of Inside Mortgage Finance noted that Bank of America was one of the 

FIGURE 7: BANK HOLDING COMPANIES WITH 1–4 FAMILY LOANS IN FORECLOSURE PROCEEDINGS, 

JUNE 2010 205

[Dollars in billions] 

Company 

Total 1–4 

Family 

Loans 

1–4 Family 

Loans in 

Foreclosure 

Percent of 1–4 

Family Loans 

in Foreclosure 

(Percent) 

Bank of America ................................................................................. 427.1 18.8 4.4 

Wells Fargo ......................................................................................... 370.7 17.6 4.7 

JPMorgan Chase .................................................................................. 259.9 19.5 7.5 

Citigroup ............................................................................................. 178.4 6.0 3.3 

HSBC North America ........................................................................... 72.9 6.6 9.0 

U.S. Bancorp ....................................................................................... 58.1 2.5 4.4 

PNC Financial Services Group ............................................................ 54.9 2.7 5.0 

SunTrust Banks ................................................................................... 47.9 2.4 5.0 

Ally Financial (GMAC) ......................................................................... 21.5 2.2 10.2 

Fifth Third Bancorp ............................................................................. 21.4 0.7 3.2 

Total for All Bank Holding Companies ............................................. 2,152.2 87.7 4.1 

205 SNL Financial. These data include revolving or permanent loans secured by real estate as evidenced by mortgages (FHA, FMHA, VA, or 

conventional) or other liens (first or junior) secured by 1–4 family residential property. 

The leading mortgage servicers are ranked below by loan volume 

serviced and market share, including the percentage of the overall 

portfolio in foreclosure. During the second quarter of 2010, the 10 

largest servicers in the United States were responsible for servicing 

67.2 percent of all outstanding residential mortgages. 

FIGURE 8: LARGEST U.S. MORTGAGE SERVICERS, JUNE 2010 206

[Dollars in billions] 

Company 

Servicing 

Portfolio 

Amount 

Percent of 

Total Loans 

Serviced 

Percent of 

Portfolio in 

Foreclosure 

Bank of America ......................................................................................... 2,135 20.1 3.3 

Wells Fargo ................................................................................................. 1,812 17.0 2.0 

JPMorgan ..................................................................................................... 1,354 12.7 3.6 

Citigroup ..................................................................................................... 678 6.4 2.3 

Ally Financial (GMAC) ................................................................................. 349 3.3 n/a 

U.S. Bancorp ............................................................................................... 190 1.8 n/a 

SunTrust Banks ........................................................................................... 176 1.7 4.9 

PHH Mortgage ............................................................................................. 156 1.5 1.8 

OneWest Bank, CA (IndyMac) ..................................................................... 155 1.5 n/a 

PNC Financial Services Group .................................................................... 150 1.4 n/a 

10 Largest Mortgage Servicers Aggregate .............................................. 7,155 67.2 

Total Residential Mortgages Outstanding ................................................ 10,640 

206 As a point of reference, as of June 2010, 63 percent of foreclosures occurred on homes where the loan was either owned or guaranteed 

by government investors such as Fannie Mae and Freddie Mac, while the remaining 37 percent of foreclosures were on homes owned by private investors. Data on percentage of portfolio in foreclosure unavailable for Ally Financial, U.S. Bancorp, OneWest Bank, and PNC Financial 

Services Group. Inside Mortgage Finance. 

2. Foreclosure Irregularities: Estimating the Cost to Banks 

Assessing the potential financial impact of foreclosure irregularities, including a prolonged foreclosure moratorium, on bank stability is complicated by the extremely fluid nature of current developments. For example, after unilaterally halting foreclosure proceedings, both Bank of America 207 and Ally Financial (GMAC) anVerDate Mar 15 2010 02:17 Dec 02, 2010 Jkt 061835 PO 00000 Frm 00054 Fmt 6602 Sfmt 6602 E:\HR\OC\A835.XXX A835

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few major mortgage lenders to steer away from the subprime market. Upon the bank’s acquisition of Countrywide in 2008, however, Bank of America became the holder of the largest 

subprime mortgage portfolio (in the industry). See Testimony of Guy Cecala, supra note 133. 208 Bank of America Q3 2010 Earnings Call Transcript, supra note 97, at 6 (‘‘On the foreclosure area . . . we changed and started to reinitiate the foreclosures . . . ’’); GMAC Mortgage 

Statement on Independent Review and Foreclosure Sales, supra note 20 (‘‘In addition to the nationwide measures, the review and remediation activities related to cases involving judicial affidavits in the 23 states continues and has been underway for approximately two months. As each 

of those files is reviewed, and remediated when needed, the foreclosure process resumes. GMAC 

Mortgage has found no evidence to date of any inappropriate foreclosures.’’). 209See Section F.3 for further discussion on potential bank liabilities from securitization title 

irregularities and mortgage repurchases or put-backs. 210 In October 2010, the SEC sent a letter to Chief Financial Officers of certain public companies to remind them of their disclosure obligations relating to the foreclosure documentation 

irregularities. See Sample SEC Letter on Disclosure Guidelines, supra note 113. The letter noted 

that affected public companies should carefully consider a variety of issues relating to foreclosure documentation irregularities, including trends, known demands, commitments and other 

similar elements that might ‘‘reasonably expect to have a material favorable or unfavorable impact on your results of operations, liquidity, and capital resources.’’ Although the letter notes 

a variety of areas that would require disclosure, the quality of disclosure will depend on what 

the companies in question are able to determine about the effect of the irregularities on their 

operations. Genuine uncertainty will result in less useful disclosure. Once the information is 

provided in a report, however, companies have a duty to update it if it becomes inaccurate or 

misleading. 211 Bank of America Corporation, 3Q10 Earnings Results, at 10–11 (Oct. 19, 2010) (online at 

phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NjY0MDd8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1); Bank of 

America Q3 2010 Earnings Call Transcript, supra note 97, at 6. 212 It was recently reported that Bank of America found errors in 10 to 25 foreclosure cases 

out of the first several hundred the bank has examined. Written Testimony of Katherine Porter, 

supra note 14, at 10); Jessica Hall & Anand Basu, Bank of America Corp Acknowledged Some 

Mistakes in Foreclosure Files as it Begins to Resubmit Documents in 102,000 Cases, the Wall 

Street Journal Said, Reuters (Oct. 25, 2010) (online at www.reuters.com/article/ 

idUSTRE69O04220101025). Bank of America expects increased costs related to irregularities in 

its foreclosure affidavit procedures during the fourth quarter of 2010 and into 2011. Costs associated with reviewing its foreclosure procedures, revising affidavit filings, and making other 

operational changes will likely result in higher noninterest expense, including higher servicing 

costs and legal expenses. Furthermore, Bank of America anticipates higher servicing costs over 

the long term if it must make changes to its foreclosure process. Finally, the time to complete 

foreclosure sales may increase temporarily, which may increase nonperforming loans and servicing advances and may impact the collectability of such advances, as well as the value of the 

bank’s mortgage servicing rights. Bank of America Corporation, Form 10–Q for the Quarterly 

Continued 

nounced their intention to resume foreclosure proceedings in the 

wake of internal reviews that did not uncover systemic irregularities, according to both firms.208 Looking ahead, the chief variables 

are the extent and duration of potential foreclosure disruptions or 

an outright moratorium, which would impact servicing and foreclosure costs and housing market prices (and recovery values). 

Such scenarios would also likely increase litigation and legal risks, 

including potential fines from state attorneys general, as well as 

raising questions regarding the extent to which title irregularities 

may permeate the system.209

During recent conference calls for third quarter 2010 earnings 

and subsequent investor presentations, the five largest mortgage 

servicers addressed questions regarding foreclosure irregularities 

and potential liabilities stemming from these issues.210

• Bank of America 211—Bank of America initially suspended foreclosure sales on October 8, 2010 across all 50 states after reviewing 

its internal foreclosure procedures. On October 18, 2010, the bank 

began amending and re-filing 102,000 foreclosure affidavits in 23 

judicial foreclosure states, a process expected to take three to five 

weeks to complete. While asserting that it is addressing issues surrounding affidavit signatures, the company claims that it has not 

been able to identify any improper foreclosure decisions.212


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Period Ended September 30, 2010, at 95 (Nov. 5, 2010) (online at sec.gov/Archives/edgar/data/ 

70858/000095012310101545/g24513e10vq.htm). 213 Citigroup, Inc., Transcript: Citi Third Quarter 2010 Earnings Review, at 6–7 (Oct. 18, 

2010) (online at www.citigroup.com/citi/fin/data/qer103tr.pdf?ieNocache=128). 214 Citigroup 10–Q for Q2 2010, supra note 101, at 52. 215 JPMorgan Q3 2010 Financial Results, supra note 180, at 14–15; Q3 2010 Earnings Call 

Transcript, supra note 53. 

JPMorgan Chase anticipates additional costs from implementation of these new procedures, 

as well as expenses associated with maintaining foreclosed properties, re-filing documents and 

foreclosure cases, or possible declining home prices during foreclosure suspensions. These costs 

are dependent on the length of the foreclosure suspension. JPMorgan Chase & Co., Form 10– 

Q for the Quarterly Period Ended September 30, 2010, at 93 (Nov. 9, 2010) (online at 

www.sec.gov/Archives/edgar/data/19617/000095012310102689/y86142e10vq.htm) (hereinafter 

‘‘JPMorgan Chase Form 10–Q’’). 216 JPMorgan Chase Form 10–Q, supra note 215, at 93, 200. 217 JPMorgan Chase & Co., BancAnalysts Association of Boston Conference, Charlie Scharf, 

CEO, Retail Financial Services, at 33 (Nov. 4, 2010) (online at files.shareholder.com/downloads/ 

ONE/967802442x0x415409/c88f9007-6b75-4d7c-abf6-846b90dbc9e3/ 

BAAB_Presentation_Draft_11-03-10_FINAL_PRINT.pdf) (hereinafter ‘‘JPM Presentation at 

BancAnalysts Association of Boston Conference’’). 218 JPMorgan Chase Form 10–Q, supra note 215, at 93. 219Wells Fargo & Company, 3Q10 Quarterly Supplement, at 26 (Oct. 20, 2010) (online at 

www.wellsfargo.com/downloads/pdf/press/3Q10_Quarterly_Supplement.pdf); Wells Fargo & Company, Q3 2010 Earnings Call Transcript (Oct. 20, 2010) (online at www.morningstar.com/earn023/earnings—earnings-call-transcript.aspx/WFC/en-US.shtml). 220Wells Fargo Update on Affidavits and Mortgage Securitizations, supra note 23. 

The company has stated that it could incur significant legal costs if its internal review of its 

foreclosure procedures causes the bank to re-execute foreclosure documents, or if foreclosure actions are challenged by a borrower or overturned by a court. Wells Fargo & Company, Form 

10–Q for the Quarterly Period Ended September 30, 2010, at 42–43 (Nov. 5, 2010) (online at 

sec.gov/Archives/edgar/data/72971/000095012310101484/f56682e10vq.htm). 221 Ally Financial Inc., 3Q10 Earnings Review, at 10 (Nov. 3, 2010) (online at phx.corporateir.net/External.File?item=UGFyZW50SUQ9MzQ2Nzg3NnxDaGlsZElEPTQwMjMzOHxUeXBlPTI=&t=1). 

• Citigroup 213—Citigroup has not announced plans to halt its 

foreclosure proceedings. The bank has nonetheless initiated an internal review of its foreclosure process due to increased industrywide focus on foreclosure processes. It has not identified any issues 

regarding its preparation and transfer of foreclosure documents 

thus far. However, Citigroup noted in a recent filing that its current foreclosure processes and financial condition could be affected 

depending on the results of its review or if any industry-wide adverse regulatory or judicial actions are taken on foreclosures.214

• JPMorgan Chase 215—Beginning in late September to mid-October 2010, JPMorgan Chase delayed foreclosure sales across 40 

states, suspending approximately 127,000 loan files currently in 

the foreclosure process.216 While the company, similar to Bank of 

America, has identified issues relating to foreclosure affidavits, it 

does not believe that any foreclosure decisions were improper. On 

November 4, 2010, JPMorgan Chase stated that it will begin refiling foreclosures within a few weeks.217 The firm also stated in 

a recent filing that it is developing new processes to ensure it satisfies all procedural requirements related to foreclosures.218

• Wells Fargo 219—Wells Fargo expressed confidence in its foreclosure documentation practices and reiterated that the firm 

has no plans to suspend foreclosures. The bank added that an 

internal review identified instances where the final affidavit 

review and some aspects of the notarization process were not 

properly executed. Accordingly, Wells Fargo is submitting supplemental affidavits for approximately 55,000 foreclosures in 

23 judicial foreclosure states.220

• Ally Financial (GMAC) 221 — As of November 3, 2010, GMAC 

Mortgage reviewed 9,523 foreclosure affidavits, with review 


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222 Ally Financial Inc., Form 10–Q for the Quarterly Period Ended September 30, 2010, at 75– 

76 (Nov. 9, 2010) (online at www.sec.gov/Archives/edgar/data/40729/000119312510252419/ 

d10q.htm). 223 A Credit Suisse research note estimated that Bank of America, JPMorgan Chase, and 

Wells Fargo could each face $500 million-$600 million in increased servicing costs and writedowns on foreclosed homes, assuming a three-month foreclosure delay and associated costs and 

write-downs approximating 1 percent per month. An FBR Capital Markets research note estimated $6 billion-$10 billion in potential losses from a three-month foreclosure moratorium 

across the entire banking industry. This estimate assumes that there are approximately 2 million homes currently in the foreclosure process, and that the costs of a delay on each foreclosed 

property is $1,000 per month. Credit Suisse, Mortgage Issues Mount, at 10 (Oct. 15, 2010) (hereinafter ‘‘Credit Suisse on Mounting Mortgage Issues’’); FBR Foreclosure Mania Conference Call, 

supra note 3. 224FBR Foreclosure Mania Conference Call, supra note 3. 225Treasury conversations with Panel staff (Oct. 21, 2010). 226Third Way staff conversations with Panel staff (Oct. 29, 2010). 227 Jason Gold and Anne Kim, The Case Against a Foreclosure Moratorium, Third Way Domestic Policy Memo, at 3–4 (Oct. 20, 2010) (online at content.thirdway.org/publications/342/ 

Third_Way_Memo_-_The_Case_Against_a_Foreclosure_Moratorium.pdf) (hereinafter ‘‘Third Way 

Domestic Policy Memo on the Case Against a Foreclosure Moratorium’’). 

pending on an additional 15,500 files. The company noted that 

its review to date has not identified any instances of improper 

foreclosures. Where appropriate, GMAC re-executed and refiled 

affidavits with the courts. GMAC stated that it has modified 

its foreclosure process, increased the size of its staff involved 

in foreclosures, provided more training, and enlisted a ‘‘specialized quality control team’’ to review each case. The company 

expects to complete all remaining foreclosure file reviews by 

the end of the year. Furthermore, GMAC recently implemented 

supplemental procedures for all new foreclosure cases in order 

to ensure that affidavits are properly prepared.222

While a market-wide foreclosure moratorium appears less likely 

following comments from the Administration and internal reviews 

by the affected banks, state attorneys general have yet to weigh in 

on the issue. Market estimates of possible bank losses related to a 

foreclosure moratorium have varied considerably, from $1.5 billion 

to $10 billion.223 Industry analysts have noted that a three-month 

foreclosure delay could increase servicing costs and losses on foreclosed properties. In addition, banks could also face added litigation 

costs associated with resolving flawed foreclosure procedures.224

However, these estimates can of course become quickly outdated in 

the current environment. As noted, firms that previously suspended foreclosures are now beginning to re-file and re-execute 

foreclosure affidavits, and market estimates accounting for shorter 

foreclosure moratoriums are currently unavailable. 

Although they have not been implicated in the recent news of 

foreclosure moratoriums, thousands of small to mid-level banks 

also face some risk from foreclosure suspensions if they act as 

servicers for larger banks.225 Generally, small community banks, 

as well as credit unions, are more likely to keep mortgage loans on 

their books as opposed to selling them in the secondary market. 

They primarily use securitization to hedge risk and increase lending power.226 Accordingly, foreclosure moratoriums would prevent 

small banks and credit unions from working through nonperforming loans on their balance sheets, limiting their capacity to 

originate new loans.227 As of June 2010, residential mortgages 


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228Small banks are those with under $1 billion in total assets. Congressional Oversight Panel, 

July Oversight Report: Small Banks in the Capital Purchase Program, at 74 (July 14, 2010) (online at cop.senate.gov/documents/cop-071410-report.pdf); SNL Financial. Credit union residential 

mortgage loan portfolios include first and second lien mortgages and home equity loans. Credit 

Union National Association, U.S. Credit Union Profile: Mid-Year 2010 Summary of Credit Union 

Operating Results, at 6 (Sept. 7, 2010) (online at www.cuna.org/research/download/ uscu_profile_2q10.pdf). 229 A deed-in-lieu permits a borrower to transfer their interest in real property to a lender 

in order to settle all indebtedness associated with that property. A short sale occurs when a 

servicer allows a homeowner to sell the home with the understanding that the proceeds from 

the sale may be less than is owed on the mortgage. U.S. Department of the Treasury, Home 

Affordable Foreclosure Alternatives (HAFA) Program (online at makinghomeaffordable.gov/ 

hafa.html) (accessed Nov. 12, 2010). 

made up 31 percent of small banks’ loan portfolios and 55 percent 

of credit union portfolios.228

3. Securitization Issues and Mortgage Put-backs 

Foreclosure documentation issues highlight other potential—and 

to some degree, related—mortgage market risks to the banking sector. Questions regarding document standards in the foreclosure 

process are tangential to broader concerns impacting bank’s representations and warranties to mortgage investors, as well as concerns regarding proper legal documentation for securitized loans. 

Given the lack of transparency into documentation procedures 

and questions as to the capacity of disparate investor groups to 

centralize claims against the industry, market estimates of potential bank liabilities stemming from securitization documentation 

issues vary widely. 

a. Securitization Title 

As discussed above, documentation standards in the foreclosure 

process have helped shine a light on potential questions regarding 

the ownership of loans sold into securitization without the proper 

assignment of title to the trust that sponsors the mortgage securities. There are at least three points at which the mortgage and the 

note must be transferred during the securitization process in order 

for the trust to have proper ownership of the mortgage and the 

note and thereby the authority to foreclose if necessary. Concerns 

that the proper paperwork was not placed in the securitization 

trust within the 90-day window stipulated by law have created uncertainty in MBS markets. 

Any lack of clarity regarding the securitization trust’s clear ownership of the underlying mortgages creates an atmosphere of uncertainty in the market and a bevy of possible problems. A 

securitization trust is not legally capable of taking action on mortgages unless it has clear ownership of the mortgages and the notes. 

Therefore, possible remedies for loans that are seriously delinquent—such as foreclosure, deed-in-lieu, or short sale—would not 

be available to the trust.229 Litigation appears likely from purchasers of MBS who have possible standing against the trusts that 

issued the MBS. Claimants will contend that the securitization 

trusts created securities that were based on mortgages which they 

did not own. Since the nation’s largest banks often created these 

securitization trusts or originated the mortgages in the pool, in a 

worst-case scenario it is possible that these institutions would be 


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230 ASF Statement on Mortgage Securitization Legal Structures and Loan Transfers, supra 

note 181. Some observers question whether, even if the procedures in the PSA were legally 

sound, they were actually accomplished. Consumer lawyers conversations with Panel staff (Nov. 

9, 2010). 231The non-agency figure includes both residential and commercial mortgage-backed securities. Securities Industry and Financial Markets Association, US Mortgage-Related Outstanding 

(online at www.sifma.org/uploadedFiles/Research/Statistics/StatisticsFiles/SF-US-Mortgage-Related-Outstanding-SIFMA.xls) (accessed Nov. 12, 2010). 232Federal National Mortgage Association, Selling Guide: Fannie Mae Single Family, at Chapters A2–2, A2–3 (Mar. 2, 2010) (online at www.efanniemae.com/sf/guides/ssg/sg/pdf/ 

sg030210.pdf). 233 It is unlikely that earlier vintages will pose a repurchase risk given the relatively more 

seasoned nature of these securities. 

forced to repurchase the MBS the trusts issued, often at a significant loss. 

On October 15, 2010, the American Securitization Forum (ASF) 

asserted that concerns regarding the legality of loan transfers for 

securitization were without merit. The statement asserted that the 

ASF’s member law firms found that the ‘‘conventional process for 

loan transfers embodied in standard legal documentation for mortgage securitizations is adequate and appropriate to transfer ownership of mortgage loans to the securitization trusts in accordance 

with applicable law.’’ 230

b. Forced Mortgage Repurchases/Put-backs 

In the context of the overall $7.6 trillion mortgage securitization 

market, approximately $5.5 trillion in MBS were issued by the 

GSEs and $2.1 trillion by non-agency issuers.231 As discussed 

above, and distinct from the foreclosure irregularities and 

securitization documentation concerns, banks make representations 

and warranties regarding the mortgage loans pooled and sold into 

GSE and private-label securities. A breach of these representations 

or warranties allows the purchaser to require the seller to repurchase the specific loan. 

While these representations and warranties vary based on the 

type of security and customer, triggers that may force put-backs include undisclosed liabilities, income or employment misrepresentation, property value falsification, and the mishandling of escrow 

funds.232 Thus far, loans originated in 2005–2008 have the highest 

concentration of repurchase demands. Repurchase volumes stemming from older vintages have not had a material effect on the nation’s largest banks, and due to tightened underwriting standards 

implemented at the end of 2008, it appears unlikely that loans 

originated after 2008 will have a high repurchase rate, although 

the enormous uncertainty in the market makes it difficult to predict repurchases with any degree of precision.233

There are meaningful distinctions between the capacity of GSEs 

and private-label investors to put-back loans to the banks. This 

helps explain why the vast majority of put-back requests and successful put-backs relate to loans sold to the GSEs. This also helps 

estimate the size of the potential risks to the banks from non-agency put-backs. GSEs benefit from direct access to the banks’ loan 

files and lower hurdles for breaches of representations and warranties due to the relatively higher standard of loan underwriting. Private label investors, on the other hand, do not have access to loan 

files, and instead must aggregate claims to request a review of loan 


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234For further discussion, please see Section D, supra. 235Wells Fargo & Company, BancAnalysts Association of Boston Conference, at 13 (Nov. 4, 

2010) (online at www.wellsfargo.com/downloads/pdf/invest_relations/presents/nov2010/ 

baab_110410.pdf) (‘‘Repurchase risk is mitigated because approximately half of the 

securitizations do not contain typical reps and warranties regarding borrower or other third 

party misrepresentations related to the loan, general compliance with underwriting guidelines, 

or property valuations’’). 236 JPM Presentation at BancAnalysts Association of Boston Conference, supra note 217, at 

24 (‘‘∼70% of loans underlying deals were low doc/no doc loans’’); Bank of America Corporation, 

BancAnalysts Association of Boston, at 13 (Nov. 4, 2010) (online at phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Njg5MDV8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1) (hereinafter 

‘‘Bank of America Presentation at BancAnalysts Association of Boston Conference’’) (‘‘Contractual representations and warranties on these deals are less rigorous than those given to GSEs. 

These deals had generally higher LTV ratios, lower FICOs and less loan documentation by program design and Disclosure’’). 237 Credit Suisse, Mortgage Put-back Losses Appear Manageable for the Large Banks, at 10 

(Oct. 26, 2010). 238 Id. at 10. 240Loans either owned or guaranteed by the GSEs have performed materially better than 

loans owned or securitized by other investors. For example, loans owned or guaranteed by the 

GSEs that are classified as seriously delinquent have increased from 3.8 percent in June 2009 

to 4.5 percent in June 2010. In comparison, the percentage of loans owned by private investors 

that are classified as seriously delinquent has increased from 10.5 percent in June 2009 to 13.1 

files.234 Moreover, and perhaps more importantly, private label securities often lack some of the representations and warranties common to agency securities. For example, Wells Fargo indicated that 

approximately half of its private label securities do not contain all 

of the representations and warranties typical of agency securities.235 Also, given that private label securities are often composed 

of loans to borrowers with minimal to non-existent supporting loan 

documentation, many do not contain warranties to protect investors from borrower fraud.236

Since the beginning of 2009, the four largest banks incurred $11.4 billion in repurchase expenses, with the group’s aggregate repurchase reserve increasing to $9.9 billion as of the third quarter 

2010.237 Bank of America incurred a total of $4.5 billion in expenses relating to representations and warranties during this period—nearly 40 percent of the $11.4 billion total that the top four 

banks have reported.238

FIGURE 9: ESTIMATED REPRESENTATION AND WARRANTIES EXPENSE AND REPURCHASE RESERVES 

AT LARGEST BANKS 239

[Dollars in millions] 

Estimated Representation and 

Warranty Expense 

Estimated Ending Repurchase 

Reserves 

FY 2009 Q1 2010 Q2 2010 Q3 2010 FY 2009 Q1 2010 Q2 2010 Q3 2010 

Bank of America ......................... $1,900 $526 $1,248 $872 $3,507 $3,325 $3,939 $4,339 

Citigroup ..................................... 526 5 351 358 482 450 727 952 

JP Morgan ................................... 940 432 667 1,464 1,705 1,982 2,332 3,332 

Wells Fargo ................................. 927 402 382 370 1,033 1,263 1,375 1,331 

Total ............................................ $4,293 $1,365 $2,648 $3,064 $6,727 $7,020 $8,373 $9,954 

239 Id. at 10. 

GSE Put-backs 

As of June 2010, 63 percent of foreclosures occurred on homes 

where the loan was either owned or guaranteed by government investors such as Fannie Mae and Freddie Mac, while the remaining 

37 percent of foreclosures were on homes owned by private investors.240 A large portion of these loans were originated and sold by 


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percent in June 2010. The same dichotomy is seen in the number of loans in the process of foreclosure. As of June 2010, 2.3 percent of loans owned or guaranteed by the GSEs were in the 

foreclosure process, whereas 8.0 percent of loans owned by private investors were classified as 

such. Staff calculations derived from Office of the Comptroller of the Currency and Office of 

Thrift Supervision, OCC and OTS Mortgage Metrics Report: Second Quarter 2010, at Tables 9, 

10, 11 (Sept. 2010) (online at www.ots.treas.gov/_files/490019.pdf) (hereinafter ‘‘OCC and OTS 

Mortgage Metrics Report’’); Foreclosure completion information provided by OCC/OTS in response to Panel request. 241 Credit Suisse on Mounting Mortgage Issues, supra note 223. 242Standard & Poor’s on the Impact of Mortgage Troubles on U.S. Banks, supra note 106, at 

2. 243 Bank of America Presentation at BancAnalysts Association of Boston Conference, supra 

note 236, at 12. 244 Bank of America Presentation at BancAnalysts Association of Boston Conference, supra 

note 236, at 12 (‘‘We estimate we are roughly two-thirds through with GSE claims on 2004– 

2008 vintages.’’). 245 JPM Presentation at BancAnalysts Association of Boston Conference, supra note 217, at 

22 (‘‘More recent additions to 90 DPD [days past due] have longer histories of payment; we believe loans going delinquent after 24 months of origination are at lower risk of repurchase.’’). 246 JPM Presentation at BancAnalysts Association of Boston Conference, supra note 217, at 

24 (‘‘45% of losses-to-date from loans that paid for 25+ months before delinquency’’); Bank of 

America Merrill Lynch, R&W: Investor hurdles mitigate impact; GSE losses peaking (Nov. 8, 

2010) (‘‘Delinquency after 2 years of timely payment materially reduces the likelihood of repurContinued 

the nation’s largest banks. As Figure 10 illustrates, the nation’s 

four largest banks sold a total of $3.1 trillion in loans to Fannie 

Mae and Freddie Mac from 2005–2008. 

FIGURE 10: LOANS SOLD TO FANNIE MAE AND FREDDIE MAC, 2005–2008 241

GSEs have already forced banks to repurchase $12.4 billion in 

mortgages.242 Bank of America, which has the largest loan portfolio 

in comparison to its peers, has received a total of $18.0 billion in 

representation and warranty claims from the GSEs on 2004–2008 

vintages. Of this total, Bank of America has resolved $11.4 billion, 

incurring $2.5 billion in associated losses.243 However, the bank believes that it has turned the corner in terms of new repurchase requests from the GSEs.244 Further, the passage of time is apparently on the banks’ side here, as JPMorgan Chase noted that 

breaches of representations and warranties generally occur within 

24 months of the loan being originated.245 JPMorgan Chase noted 

that delinquencies or foreclosures on loans aged more than two 

years generally reflect economic hardship of the borrower.246


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chase from GSEs (or others, for that matter), since the likelihood of default being caused by 

origination problems is much lower; instead, default was likely triggered by loss of employment, 

decline in home value, and the like.’’). 247Standard & Poor’s on the Impact of Mortgage Troubles on U.S. Banks, supra note 106, at 

4. 248Standard & Poor’s on the Impact of Mortgage Troubles on U.S. Banks, supra note 106, at 

4. (‘‘[W]e believe that the representation and warranties were not standard across all privatelabel securities and may have provided differing levels of protection to investors. They do not 

appear to have the same basis on which to ask the banks to buy back the loans because the 

banks did not, in our view, make similar promises in the representation and warranties.’’). 249 As of June 2010, the OCC/OTS reports that 11.4 percent of the Alt-A and 19.4 percent of 

the subprime loans it services are classified as seriously delinquent as compared to an overall 

rate of 6.2 percent. OCC and OTS Mortgage Metrics Report, supra note 240. Also, for example, 

JPMorgan Chase noted that 41 percent and 32 percent of its private-label subprime and AltA securities, respectively, issued between 2005 and 2008 had been 90 days or more past due 

at one point as compared to only 13 percent of its prime mortgages. JPM Presentation at 

BancAnalysts Association of Boston Conference, supra note 217, at 24 . 250 Bank of America Presentation at BancAnalysts Association of Boston Conference, supra 

note 236. 251 As part of its MBS purchase program, the Federal Reserve currently owns approximately 

$1.1 trillion of agency MBS. Due to the nature of the government guarantee attached to agency 

MBS, loans that are over 120 days past due are automatically bought back at par by the government agencies such as Fannie Mae and Freddie Mac that guaranteed them. Therefore the Federal Reserve’s $1.1 trillion in MBS holdings do not pose a direct put-back risk to the banking 

industry, however, if the loans are bought back by the agency guarantors, these agencies have 

the right to take action against the entities that originally sold the loans if there were breaches 

Private-Label Put-backs 

In comparison with the GSEs, private-label investors do not benefit from the same degree of protection through the representations 

and warranties common in the agency PSAs.247 There were, however, representations and warranties in private-label securities 

that, if violated, could provide an outlet for mortgage put-backs. In 

theory, systemic breaches in these securities could prove a bigger 

and potentially more problematic exposure, although market observers have cited logistical impediments to centralizing claims, in 

addition to the higher hurdles necessary to put-back securities successfully to the banks.248 Since the majority of subprime and AltA originators folded during the crisis, the bulk of the litigation is 

directed at the underwriters and any large, surviving originators. 

Thus far, however, subprime and Alt-A repurchase requests have 

been slow to materialize. Relative to subprime and Alt-A loans, 

jumbo loans to higher-net borrowers—which were in turn sold to 

private label investors—have performed substantially better.249

Bank of America offers a window into the comparatively slow 

rate at which private-label securities have been put-back to banks. 

Between 2004 and 2008, Bank of America sold approximately $750 

billion of loans to parties other than the GSEs.250 As of October 

2010, Bank of America received $3.9 billion in repurchase requests 

from private-label and whole-loan investors. To date, Bank of 

America has rescinded $1.9 billion in private-label and whole-loan 

put-back claims and approved $1.0 billion for repurchase, with an 

estimated loss of $600 million. 

This level of actual put-back requests highlights the difficulty in 

maneuvering the steps necessary to put-back a loan, which begins 

with a group of investors in the same security or tranche of a security banding together to request access to the underlying loan documents. For example, the group of investors petitioning for paperwork relating to $47 billion in Bank of America loans remain a 

number of steps away from being in a position to request formally 

a put-back.251 Figure 11, below, illustrates the dollar amount of 


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or violations. The Federal Reserve Bank of New York also owns private-label RMBS in its Maiden Lane vehicles created under its 13(3) authority. 

FRBNY’s holdings of private-label RMBS are concentrated in the Maiden Lane II vehicle created as part of the government’s intervention in American International Group (AIG). As of 

June 30, 2010, the fair value of private-label RMBS in Maiden Lane II was $14.8 billion. The 

sector distribution of Maiden Lane II was 54.6 percent subprime, 30.8 percent Alt-A adjustable 

rate mortgage (ARM), 6.8 percent option ARM, and the remainder was classified as ‘‘other.’’ The 

$47 billion action that FRBNY joined involves only the private-label RMBS it holds in the Maiden Lane vehicles, and is primarily localized within Maiden Lane II. FRBNY staff conversations 

with Panel staff (Oct. 26, 2010); Board of Governors of the Federal Reserve System staff conversations with Panel staff (Nov. 10, 2010); Board of Governors of the Federal Reserve System, 

Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance 

Sheet, at 19 (Oct. 2010) (online at www.federalreserve.gov/monetarypolicy/ files/ 

monthlyclbsreport201010.pdf) (hereinafter ‘‘Federal Reserve Report on Credit and Liquidity Programs and the Balance Sheet’’); Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1)(Nov. 12, 2010) (online at www.federalreserve.gov/releases/h41/) 

(hereinafter ‘‘Federal Reserve Statistical Release H.4.1’’). For more information on the Federal 

Reserve’s section 13(3) authority, please see 12 U.S.C. § 343 (providing that the Federal Reserve 

Board ‘‘may authorize any Federal reserve bank . . . to discount . . . notes, drafts, and bills 

of exchange’’ for ‘‘any individual, partnership, or corporation’’ if three conditions are met). See 

also Congressional Oversight Panel, June Oversight Report: The AIG Rescue, Its Impact on Markets, and the Government’s Exit Strategy, at 79–83 (June 10, 2010) (online at cop.senate.gov/documents/cop-061010-report.pdf). 252There were no sales in 2009. Credit Suisse on Mounting Mortgage Issues, supra note 223. 

non-agency loans originated by the nation’s four largest banks between 2005 and 2008. 

FIGURE 11: NON-AGENCY ORIGINATIONS, 2005–2008 252

Put-back Loss Estimates 

Losses stemming from mortgage put-backs are viewed as the biggest potential liability of the banking sector from the foreclosure 

crisis. While it is difficult to quantify the impact this issue may 

have on bank balance sheets, a number of analysts have compiled 

estimates on potential risks to the sector. 

The first step in estimating the industry’s exposure is identifying 

the appropriate universe of loans, within the $10.6 trillion mortgage debt market. The 2005–2008 period is the starting point for 

this analysis. Of the loans originated during this period, $3.7 trillion were sold by banks to the GSEs and $1.5 trillion were sold to 


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253 Nomura Equity Research, Private Label Put-Back Concerns are Overdone, Private Investors 

Face Hurdles (Nov. 1, 2010) (hereinafter ‘‘Nomura Equity Research on Private Label Put-Back 

Concerns’’); Goldman Sachs, Assessing the Mortgage Morass (Oct. 15, 2010) (hereinafter ‘‘Goldman Sachs on Assessing the Mortgage Morass’’). 254Subsequent estimates—loan delinquencies, put-back requests, successful put-backs, and 

loss severity—are surveyed from the following research reports: Bernstein Research, Bank Stock 

Weekly: Return to Lender? Sizing Rep and Warranty Exposure (Sept. 24, 2010) (hereinafter 

‘‘Bernstein Research Report on Sizing Rep and Warranty Exposure’’); Barclays Capital, Focus 

on Mortgage Repurchase Risk (Sept. 2, 2010); J.P. Morgan, Putbacks and Foreclosures: Fact vs. 

Fiction (Oct. 15, 2010) (hereinafter ‘‘Barclays Capital Research Report on Putbacks and Foreclosures’’); Goldman Sachs on Assessing the Mortgage Morass, supra note 253; Nomura Equity 

Research on Private Label Put-Back Concerns, supra note 253; Citigroup Global Markets, R&W 

Losses Manageable, but Non-Agency May be Costly Wildcard (Sept. 26, 2010) (hereinafter 

‘‘Citigroup Research Report on Non-Agency Losses’’); Compass Point Research & Trading, LLC, 

GSE Mortgage Repurchase Risk Poses Future Headwinds: Quantifying Losses (Mar. 15, 2010); 

Deutsche Bank Revisits Putbacks and Securitizations, supra note 192; JPM Presentation at 

BancAnalysts Association of Boston Conference, supra note 217, at 26. 255Four analyst estimates were used for the blended private-label loan losses percentage of 

30%: Goldman Sachs—28%, Bernstein Research—25%, Nomura Equity Research—25%, and 

Credit Suisse—40%. Goldman Sachs on Assessing the Mortgage Morass, supra note 253; 

Nomura Equity Research on Private Label Put-Back Concerns, supra note 253; Bernstein Research Report on Sizing Rep and Warranty Exposure, supra note 254; Credit Suisse on Mortgage Put-back Losses, supra note 192. 

private label investors.253 Accordingly, this $5.2 trillion in agency 

and non-agency loans and securities sold by the banks during the 

2005–2008 period is the starting point for a series of assumptions— 

loan delinquencies, put-back requests, successful put-backs, and 

loss severity—that ultimately drive estimates of potential bank 

losses. 

The Panel has averaged published loss estimates from bank analysts in order to provide a top-level illustration of the cost mortgage 

put-backs could inflict on bank balance sheets. The estimate below 

represents a baseline sample of five analyst estimates for the GSE 

portion and six analyst estimates for the private-label approximation. Accordingly, realized losses could be significantly higher or 

meaningfully lower. 

As outlined below, there are numerous assumptions involved in 

estimating potential losses from put-backs.254

• Projected Loan Losses—Delinquent or non-performing mortgage loans provide the initial pipeline for potential mortgage 

put-backs. Accordingly, estimates of cumulative losses on loans 

issued between 2005 and 2008 govern the aggregate put-back 

risk of the banks. The blended estimate for GSE loans is 13 

percent, and the blended private label estimate is 30 percent.255

• Gross Put-backs—The next step is projecting what percentage of these delinquent or nonperforming loans holders will 

choose to put-back to the banks. The average estimate for 

gross put-backs for the GSEs is 30 percent, and private label 

loans is 24 percent. • Successful Put-backs—Of these put-back requests, analysts 

estimate that 50 percent of GSE loans and 33 percent of private label loans are put-back successfully to the banks. • Severity—The calculation involves the loss severity on loans 

that are successfully put-back to the banks (i.e., how much the 

banks have to pay to make the aggrieved investors whole). The 

blended average severity rate used by analysts for both GSE 

and the private label loans is 50 percent. 

Using the assumptions outlined above, the estimated loss to the 

industry from mortgage put-backs is $52 billion (see Figure 12 


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256This range is comprised of a number of base-case or mid-point estimates for potential 

losses across the industry from put-backs: Standard & Poor’s—$43 billion, Deutsche Bank—$43 

billion, FBR Capital Markets—$44 billion in potential losses, Citigroup—$50.1 billion, J.P Morgan—$55 billion, Goldman Sachs—$71 billion, Credit Suisse—$65 billion, The Deutsche Bank 

estimate is for $31 billion in remaining losses, the $12 billion in realized losses thus far was 

added to create a consistent metric. FBR on Repurchase-Related Losses, supra note 192; Credit 

Suisse on Mortgage Put-back Losses, supra note 192; Deutsche Bank Revisits Putbacks and 

Securitizations, supra note 192; Standard & Poor’s on the Impact of Mortgage Troubles on U.S. 

Banks, supra note 106, at 4; Citigroup Research Report on Non-Agency Losses, supra note 254; 

Barclays Capital Research Report on Putbacks and Foreclosures, supra note 254; Goldman 

Sachs on Assessing the Mortgage Morass, supra note 253. 259 It is worth noting, however, that Bank of America and JPMorgan Chase are the more 

meaningful contributors, accounting for approximately 50 percent of the industry’s total projected losses by analysts. The mid-point of each of these estimates was used to compute the 

range. Deutsche Bank Revisits Putbacks and Securitizations, supra note 192, at 7; Credit Suisse 

on Mounting Mortgage Issues, supra note 223; FBR on Repurchase-Related Losses, supra note 

192. 260The $11.4 billion in estimated expenses at the top four banks has been since the first quarter of 2009. Credit Suisse on Mortgage Put-back Losses, supra note 192, at 10. 261Deutsche Bank Revisits Putbacks and Securitizations, supra note 192. 

below). This compares to industry-wide estimates of base-case 

losses from mortgage put-backs of $43 billion to $65 billion.256

FIGURE 12: PUT-BACK LOSS ESTIMATES 257

[Dollars in billions] 

Agency MBS Private Label MBS Total (%) ($) (%) ($) 

2005–2008 MBS Sold 258 .......................................................... $3,651 $1,358 $5,009 

Projected Loan Losses ............................................................... 13 475 30 407 882 

Gross Put-backs (Requests) ..................................................... 30 142 24 98 240 

Successful Put-backs ................................................................ 50 71 33 32 103 

Put-back Severity ...................................................................... 50 50 

Total Put-back Losses ............................................................. $36 $16 $52 

257 JPM Presentation at BancAnalysts Association of Boston Conference, supra note 217, at 26. 258 These figures represent the value of the MBS sold either to the GSEs or private-label investors during this period that are still currently 

outstanding. Nomura Equity Research on Private Label Put-Back Concerns, supra note 253; Goldman Sachs on Assessing the Mortgage Mo- rass, supra note 253. 

The estimated $52 billion would be borne predominantly by four 

firms (Bank of America, JPMorgan Chase, Wells Fargo, and 

Citigroup), accounting for the majority of the industry’s total exposure and projected losses.259 In the aggregate these four banks 

have already reserved $9.9 billion for future representations and 

warranties expenses, which is in addition to the $11.4 billion in expenses already incurred.260 Thus, of this potential liability, $21.3 

billion has either been previously expensed or reserved for by the 

major banks.261 Given the timing associated with put-back requests and associated accounting recognition, it is not inconceivable 

that the major banks could recognize future losses over a 2–3 year 

period. 

G. Effect of Irregularities and Foreclosure Freezes on 

Housing Market 

1. Foreclosure Freezes and their Effect on Housing 

In previous reports, the Panel has noted the many undesirable 

consequences that foreclosures, especially mass foreclosures, have 

on individuals, families, neighborhoods, local governments, and the 


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262March 2009 Oversight Report, supra note 6, at 9–11. 263See, e.g., Written Testimony of Julia Gordon, supra note 171, at 1–2. 264See, e.g., Statement from Bank of America Home Loans, supra note 21. 265See, e.g., Office of Maryland Governor Martin O’Malley, Governor Martin O’Malley, Maryland Congressional Delegation Request Court Intervention in Halting Foreclosures (Oct. 8, 2010) 

(online at www.governor.maryland.gov/pressreleases/101009b.asp). 266See, e.g., Reid Welcomes Bank of America Decision, supra note 24; Foreclosure Moratorium: 

Cracking Down on Liar Liens, supra note 24. 267March 2009 Oversight Report, supra note 6, at 62–63 (Discussing foreclosure freezes: 

‘‘Again, this raises the question of whether the economic efficiency of foreclosures should be 

viewed in the context of individual foreclosures or in the context of the macroeconomic impact 

of widespread foreclosures. If the former, then caution should be exercised about foreclosure 

moratoria and other forms of delay to the extent it prevents efficient foreclosures. But if the 

latter is the proper view, then it may well be that some individually efficient foreclosures should 

nonetheless be prevented in order to mitigate the macroeconomic impact of mass foreclosures.’’). 268March 2009 Oversight Report, supra note 6, at 37 (Discussing loan modification programs: 

‘‘As an initial matter, however, it must be recognized that some foreclosures are not avoidable 

and some workouts may not be economical. This should temper expectations about the scope 

of any modification program.’’). 

economy as a whole.262 Additionally, housing experts testifying at 

Panel hearings have emphasized that mass foreclosures cause damage to the economy and social fabric of the country.263 Certainly, 

the injection over the past several years of millions of foreclosedupon homes into an already weak housing market has had a deleterious effect on home prices. These effects are especially relevant 

in examining what repercussions foreclosure freezes would have on 

the housing market, and the advisability of such freezes. 

Questions remain as to how broadly the current foreclosure irregularities will affect the housing market, and the scale of the losses 

involved. The immediate effect of the foreclosure document irregularities has been to cause many servicers to freeze all foreclosure 

processings, although some freezes have been temporary.264 Some 

states have encouraged these foreclosure freezes,265 and government-imposed, blanket freezes on all foreclosures have been under 

discussion.266 The housing market may not be seriously affected by 

the current freezes on pending foreclosures, which may actually 

cause home prices of unaffected homes to rise. Any foreclosure moratorium that is not accompanied by action to address the underlying issues associated with mass foreclosures and the irregularities, however, will add delays but will not provide solutions. Beyond the effects of the current freezes, mortgage documentation 

irregularities may increase home buyers’ and mortgage investors’ 

perceptions of risk and damage confidence and trust in the housing 

market, all of which may drive down home prices. 

In considering the possible effects foreclosure freezes may have 

on the housing market, it is important to distinguish, as the Panel 

has in previous reports, between the effects these foreclosures and 

foreclosure freezes may have on individuals versus effects that are 

more systemic or macroeconomic, as these interests may come into 

conflict at times.267 The Panel has also repeatedly acknowledged 

that the circumstances surrounding some mortgages make foreclosure simply unavoidable.268 Additionally, the current housing 

market has, among other difficult problems, a severe oversupply of 

housing in relation to current demand, which has fallen substantially since the peak bubble years due to higher unemployment and 

other economic hardships. This fundamental supply/demand imbalance has driven down home prices nationwide, but especially in 


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269The oversupply of homes can be clearly seen from ‘‘for sale’’ inventory statistics, which the 

Panel has discussed in previous reports. See, e.g., March 2009 Oversight Report, supra note 6, 

at 107–108. September 2010 for-sale housing inventory stands at 4.04 million homes, a 10.7 

month supply at current sales rates, up from the 3.59 million homes representing an 8.6 month 

supply cited in the Panel’s April report on foreclosures. National Association of Realtors, September Existing-Home Sales Show Another Strong Gain (Oct. 25, 2010) (online at 

www.realtor.org/press_room/news_releases/2010/10/sept_strong). 270The Panel has discussed some of the pros and cons of foreclosure freezes in prior reports, 

but not in the context of the irregularities. March 2009 Oversight Report, supra note 6, at 61– 

63. 271March 2009 Oversight Report, supra note 6, at 61. 272See, e.g., March 2009 Oversight Report, supra note 6, at 9–11. 273 John Campbell, Stefano Giglio, and Parag Pathak, Forced Sales and House Prices, at 10, 

18, 21, Unpublished manuscript (July 2010) (online at econ-www.mit.edu/files/5694) (‘‘. . . the 

typical foreclosure during this period lowered the price of the foreclosed house by $44,000 and 

the prices of neighboring houses by a total of $477,000, for a total loss in housing value of 

$520,000.’’ and ‘‘Our preferred estimate of the spillover effect suggests that each foreclosure that 

takes place 0.05 miles away lowers the price of a house by about 1%.’’). 

areas such as Nevada or Florida, where a great many new homes 

were constructed.269

There are numerous arguments both for and against foreclosure 

freezes at this time.270 Freezing foreclosures may allow time for 

servicers, state governments, and courts to sort out the irregularity 

situation and may avoid illegal or erroneous foreclosures in some 

cases. Voluntary, limited freezes may be sensible for particular 

servicers. The costs associated with a mandatory foreclosure freeze 

may also pressure servicers to resolve frozen foreclosures through 

modifications.271 Further, foreclosure freezes can temporarily reduce the number of real estate owned by banks and pre-foreclosure 

homes coming to market, reducing excess supply, which can be 

beneficial for home prices in the short term. The longer-term consequences of freezes depend on the ultimate solution to the issues 

giving rise to the freezes. 

In addition, foreclosures have many well-documented negative financial and social consequences on families and neighborhoods that 

might be mitigated by a foreclosure freeze.272 Vacant homes can attract thieves and vandals. If not maintained by the lender, properties foreclosed upon and repossessed by the lender—properties 

also known as real-estate owned (REOs), often become eyesores, detracting from the appearance of the neighborhood and reducing 

local home values. The drop in the value of neighboring homes has 

been corroborated by a recent study. Although the authors found 

that the impact of foreclosed homes on each individual neighboring 

home is relatively small, these losses can amount to a considerable 

total loss in value to the neighborhood. Not surprisingly, the researchers found a more dramatic decline in value for the foreclosed 

home itself. The study indicated that foreclosure lowers a home’s 

value by an average of 27 percent, much more than other events, 

such as personal bankruptcy, that also lead to forced home sales. 

The researchers attribute these losses primarily to the urgency 

with which lenders dispose of REOs and to damage inflicted on vacant, lender-owned homes.273

In addition to lowering the value of the home itself, a foreclosure 

affects the surrounding neighborhood, especially if the home is 

clearly marked with a sale sign that says ‘‘foreclosure.’’ A reduction 

in price from a foreclosed property can affect the values of surrounding homes if the low price is used as a comparable sale for 

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274Zillow does not include foreclosure data in its home price estimates; however, a person can 

click on a home, including foreclosed homes, and see its sales price. 275See, e.g., Vicki Bean, Ingrid Gould Ellen, et al., Kids and Foreclosures: New York City 

(Sept. 2010) (online at steinhardt.nyu.edu/scmsAdmin/media/users/lah431/Foreclosures_and_Kids_Policy_Brief_Sept_2010.pdf); Vanesa Estrada Correa, The Housing Downturn 

and Racial Inequality, Policy Matters, Vol. 3, No. 2 (Fall 2009) (online at 

www.policymatters.ucr.edu/pmatters-vol3-2-housing.pdf). 276 Congressional Oversight Panel, Testimony of Julia Gordon, senior policy council, Center for 

Responsible Lending, Transcript: COP Hearing on TARP Foreclosure Mitigation Programs (Oct. 

27, 2010) (publication forthcoming) (online at cop.senate.gov/hearings/library/hearing-102710- 

foreclosure.cfm) (‘‘African American and Latino families are much more likely than whites to 

lose their homes, and we estimate that communities of color will lose over $360 billion worth 

of wealth.’’). 277First American CoreLogic, ‘‘Shadow Housing Inventory’’ Put At 1.7 Million in 3Q According 

to First American CoreLogic (Dec. 17, 2009) (online at www.facorelogic.com/uploadedFiles/Newsroom/RES_in_the_News/FACL_Shadow_Inventory_121809.pdf); Laurie Goodman, Robert 

Hunter, et al., Amherst Securities Group LP, Amherst Mortgage Insight: Housing Overhang/ 

Shadow Inventory = Enormous Problem, at 1 (Sept. 23, 2009) (online at matrix.millersamuel.com/wp-content/3q09/Amherst%20Mortgage%20Insight%2009232009.pdf). 278 James J. Saccacio, chief executive officer of the online foreclosure marketplace RealtyTrac, 

expects that ‘‘if the lenders can resolve the documentation issue quickly, then we would expect 

the temporary lull in foreclosure activity to be followed by a parallel spike in activity as many 

of the delayed foreclosures move forward in the foreclosure process. However, if the documentation issue cannot be quickly resolved and expands to more lenders we could see a chilling effect 

on the overall housing market as sales of pre-foreclosure and foreclosed properties, which account for nearly one-third of all sales, dry up and the shadow inventory of distressed properties 

grows—causing more uncertainty about home prices.’’ RealtyTrac, Foreclosure Activity Increases 

4 Percent in Third Quarter (Oct. 14, 2010) (online at www.realtytrac.com/content/press-releases/ 

q3-2010-and-september-2010-foreclosure-reports-6108) (hereinafter ‘‘RealtyTrac Press Release on 

Foreclosure Activity’’). 

parable sales from appraisals, as is often the case, these sale prices 

are readily accessible public information. For example, considering 

the popularity of real estate sites such as Zillow and Trulia that 

show home sale prices, buyers can easily see these low foreclosure 

sale prices and are likely to reduce their offers accordingly.274 Furthermore, as Julia Gordon of the Center for Responsible Lending 

and several academic studies observe,275 minority communities are 

disproportionately affected by foreclosures and their consequences.276 These negative externalities from foreclosures are 

borne not by any of the parties to the mortgage, but by the neighbors and the community, who are innocent bystanders. 

One of the most common arguments against foreclosure freezes 

concerns the effect that freezes could have on shadow inventory— 

properties likely to be sold in the near future that are not currently 

on the market, and are therefore not counted in supply inventory 

statistics. A prolonged freeze on foreclosures without a diminution 

in the number of homes in foreclosure would add to the already 

substantial problem of shadow inventory. Of course, increased 

shadow inventory can be addressed either by foreclosing and selling the homes, or by creating circumstances that allow current 

homeowners to stay in their homes. Although there are no reliable 

measures (or definitions) of shadow inventory, estimates range 

from 1.7 million to 7 million homes.277 These homes represent additional supply that the market will eventually have to accommodate, so long as the homes are not removed from the shadow inventory due to circumstances such as loan modifications or an improvement in the financial condition of borrowers.278

Beyond shadow inventory, foreclosure sales consist of sales of 

homes immediately prior to foreclosure and sales of REOs. In the 

12 months between September 2009 and August 2010, 4.13 million 

existing homes were sold in the United States, approximately 30 


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279 National Association of Realtors, Existing-Home Sales Move Up in August (Sept. 23, 2010) 

(online at www.realtor.org/press_room/news_releases/2010/09/ehs_move); HOPE Now Alliance, 

Appendix—Mortgage Loss Mitigation Statistics: Industry Extrapolations (Monthly for Dec 2008 

to Nov 2009) (online at www.hopenow.com/industry-data/ 

HOPE%20NOW%20National%20Data%20July07%20to%20Nov09%20v2%20(2).pdf); HOPE Now 

Alliance, Industry Extrapolations and Metrics (May 2010) (online at www.hopenow.com/industrydata/HOPE%20NOW%20Data%20Report%20(May)%2006-21-2010.pdf); HOPE Now Alliance, Industry Extrapolations and Metrics (Aug. 2010) (online at hopenow.com/industry-data/ 

HOPE%20NOW%20Data%20Report%20(August)%2010-05-2010%20v2b.pdf). 280 RealtyTrac Press Release on Foreclosure Activity, supra note 278. 281MBA National Delinquency Survey, Q2 2010, supra note 199. See also MBA Press Release 

on Delinquencies and Foreclosure Starts, supra note 199. 282Zach Fox, Credit Suisse: $1 Trillion worth of ARMs still face resets, SNL Financial (Feb. 

25, 2010). The Panel addressed the impact of interest rate resets in its April 2010 Report on 

foreclosures. Congressional Oversight Panel, April Oversight Report: Evaluating Progress of 

TARP Foreclosure Mitigation Programs, at 111–115, 123 (Apr. 14, 2010) (online at 

cop.senate.gov/documents/cop-041410-report.pdf) (hereinafter ‘‘April 2010 Ovesright Report’’). 283Fannie Mae and Freddie Mac would be impacted directly by a freeze because they would 

have to continue advancing coupon payments to bondholders while not receiving any revenue 

from disposal of foreclosed properties, upon which they are already not receiving mortgage payments. These costs would almost certainly be borne by taxpayers, and depending on the duration of the freeze and how the housing market responds to it, they could be substantial. 

Press reports and Panel staff discussions with industry sources have indicated that, as part 

of an effort to restart foreclosures, Fannie Mae and Freddie Mac were until recently negotiating 

an indemnification agreement with servicers and title insurers. This would have been along the 

lines of the recent agreement between Bank of America and Fidelity National Financial, mentioned above in Section C, in which Bank of America agreed to indemnify Fidelity National (a 

title insurer) for losses incurred due to servicer errors. However, industry sources stated that 

the GSEs had recently cooled to this effort. Industry sources conversations with Panel staff 

(Nov. 9, 2010); Nick Timiraos, Fannie, Freddie Seek End to Freeze, Wall Street Journal (Oct. 

23, 2010) (online at online.wsj.com/article/ 

SB10001424052702304354104575568621229952944.html); see also Statement from Bank of 

America Home Loans, supra note 16. 284Third Way Domestic Policy Memo on the Case Against a Foreclosure Moratorium, supra 

note 227. 285See Section F.2, supra. 

percent of which were foreclosure sales.279 Further, lenders are estimated to own 290,000 properties as REOs.280 Currently, approximately 2 million homes, or 4.6 percent of all mortgaged properties, 

are classified as in the foreclosure process. Another 2 million, or 4.5 

percent of mortgaged properties, are more than 90 days past 

due.281 The level of foreclosures is, further, expected to rise: more 

than $1 trillion in adjustable-rate mortgages are expected to experience interest rate resets between 2010 and 2012, an event that 

is positively correlated with delinquency and foreclosure.282 Foreclosure sales therefore represent a very substantial portion of housing market activity, with many more foreclosures either in the 

pipeline or likely to enter the pipeline in the coming years. 

Opponents of mandatory foreclosure freezes have also argued 

that a widespread freeze would encourage defaults by eliminating 

the negative consequences of default; that foreclosure freezes are 

bad for mortgage investors (including taxpayers, as owners of the 

GSEs) 283 because they reduce investment returns by delaying the 

payment of foreclosure sale proceeds; and that they would disproportionately harm smaller banks and credit unions, which are 

heavily invested in home mortgages.284 Further, when smaller 

banks and credit unions service loans, payments to investors on 

non-performing loans must come from significantly smaller cash 

cushions than they do for the largest banks and servicers.285 James 

Lockhart, former regulator of Fannie Mae and Freddie Mac, has 

stated that freezes will also extend the time that homes in foreclosure proceedings will be left vacant, with attendant negative efVerDate Mar 15 2010 02:17 Dec 02, 2010 Jkt 061835 PO 00000 Frm 00069 Fmt 6602 Sfmt 6602 E:\HR\OC\A835.XXX A835

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286 Bloomberg News, Interview with WL Ross & Co.’s James Lockhart (Oct. 27, 2010) (online 

at www.bloomberg.com/video/64040362/). 287 JPMorgan Chase estimates that approximately one-third of the homes upon which it forecloses are already vacant by the time the foreclosure process commences. Stephen Meister, 

Foreclosuregate is Quickly Spinning Out of Control, RealClearMarkets (Oct. 22, 2010) (online at 

www.realclearmarkets.com/articles/2010/10/22/foreclosuregate_is_quickly_spinning_out_of_control.html). Similarly, there are reports about a type of strategic default, commonly known as ‘‘jingle mail,’’ where the delinquent borrower vacates the 

home and mails the servicer the keys in the hope that the servicer will accept the act as a deedin-lieu-of-foreclosure, or simply to get the foreclosure process over with. 288David H. Stevens, commissioner, Federal Housing Administration, Remarks at the Mortgage Bankers Association Annual Convention, at 7, 20 (Oct. 26, 2010). 

fects on the surrounding neighborhood.286 Such cases would presumably involve already vacant, foreclosed-upon homes, and homes 

with impending or ongoing foreclosure proceedings where the borrower has chosen to vacate early, as occasionally happens.287

2. Foreclosure Irregularities and the Crisis of Confidence 

The apparently widespread nature of the foreclosure irregularities that have come to light has the potential to reduce public 

trust substantially in the entire real estate industry, especially in 

the legitimacy of important legal documents and the good faith of 

other market participants. Under these circumstances, either buying or lending on a home will appear to be substantially more risky 

than before. If buyers suspect that homes, especially foreclosed 

homes, may have unknown title and legal problems, they may be 

less likely to buy, or at least they may lower their offers to account 

for the increased risks. Since foreclosure sales currently account for 

such a large portion of market activity, in the absence of solutions 

that reduce foreclosures, a reduction in demand for previously foreclosed-upon properties would have negative effects on the overall 

housing market. David Stevens, commissioner of the Federal Housing Administration, recently noted that the mortgage industry now 

faces an ‘‘enormous trust deficit’’ that risks ‘‘scaring’’ off an entire 

generation of young people from homeownership.288

Similar dynamics may impact the availability and cost of mortgages as well, as mortgage investors, who provide the capital that 

ultimately supports home prices, reassess their perceptions of risk. 

The exposure of foreclosure irregularities has raised a host of potential risks for investors, such as the possibility that MBS trusts 

may not actually own the underlying loans they claim to own, that 

servicers may not be able to foreclose upon delinquent borrowers 

and thus recover invested capital, that borrowers who have already 

been foreclosed upon may sue, or that other currently unknown liability issues exist. These new risks could cause some mortgage investors to look for safer alternative investments or to increase their 

investment return requirements to compensate for the increased 

risks. With wary investors making less capital available for mortgages, and reevaluating the risk of residential lending, mortgage 

interest rates could rise, in turn decreasing the affordability of 

homes and depressing home prices, as the same monthly payment 

now supports a smaller mortgage. 

Additionally, both the foreclosure freezes and the legal wrangling 

between homeowners, servicers, title companies, and investors that 

appears inevitable at this point, and in the absence of a solution 

to the problem of mass foreclosures could extend the time it will 


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289 Cf. The White House, Press Briefing (Oct. 12, 2010) (online at www.whitehouse.gov/thepress-office/2010/10/12/press-briefing-press-secretary-robert-gibbs-10122010) (‘‘We also have 

pointed out, though, that the idea of a national moratorium would impact the recovery in the 

housing sector, as anybody that wished to enter into a contract or execute a contract to purchase 

a home that had previously been foreclosed on, that process stops. That means houses and 

neighborhoods remain empty even if there are buyers ready, willing and able to do so.’’). 290 In prior reports, the Panel has acknowledged that the delays caused by foreclosure freezes 

create additional costs for servicers, but also have possibly beneficial effects for borrowers. 

March 2009 Oversight Report, supra note 6, at 61–63. 291Mortgage lenders who make loans on formerly foreclosed homes where the legal ownership 

of the property is uncertain due to foreclosure irregularities risk the possibility that other creditors could come forward with competing claims to the collateral. 292Servicers of GSE mortgages are required to participate in HAMP for their GSE portfolios. 

Servicers of non-GSE mortgages may elect to sign a Servicer Participation Agreement in order 

to participate in the program. Once an agreement has been signed, the participating servicer 

must evaluate all mortgages under HAMP unless the participation contract is terminated. See 

Congressional Oversight Panel, October Oversight Report: An Assessment of Foreclosure Mitigation Efforts After Six Months, at 44–45 (Oct. 9, 2009) (online at cop.senate.gov/documents/cop100909-report.pdf). 

take for the inventory of homes for sale to be cleared from the system, and thus could potentially delay the recovery of the housing 

market.289 Further, general uncertainty about the scope of these 

problems and how they will be addressed by market participants 

and governments could have a chilling effect on both home sales 

and mortgage investment, as people adopt a ‘‘wait and see’’ attitude. On the other hand, some delay could be beneficial in that it 

would provide the time necessary to arrive at a more comprehensive solution to the many complex issues involved in, or underlying, 

this situation.290

The recent and developing nature of the foreclosure irregularities 

means that predicting their effects, as well as those of any resulting foreclosure freezes, on the housing market necessarily involves 

a high degree of speculation. Actual housing market movements 

will depend on, among other things, the scope and severity of the 

foreclosure irregularities, the resolution of various legal issues, government actions, and on the reactions of homeowners, home buyers, servicers, and mortgage investors. It seems clear, however, 

that the many unknowns, uncertain solutions, and potential liability for fraud greatly add to the risk inherent in owning or lending 

on affected homes.291

H. Impact on HAMP 

HAMP is a nationwide mortgage modification program established in 2009, using TARP funds, as an answer to the growing 

foreclosure problem. HAMP is designed to provide a mortgage 

modification to homeowners in those cases in which modification, 

from the perspective of the mortgage holder, is an economically 

preferable outcome to foreclosure. The program provides financial 

incentives to servicers to modify mortgages for homeowners at risk 

of default, and incentives for the beneficiaries of these modifications to stay current on their mortgage payments going forward.292

Participation in the program by servicers is on a voluntary basis. 

Once a servicer is in HAMP, though, if a borrower meets certain 

eligibility criteria, participating servicers must run a test, known 

as a net present value (NPV) test, to evaluate whether a foreclosure or a loan modification would yield a higher value. If the 

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293Written Testimony of Phyllis Caldwell, supra note 142, at 1. 294Testimony of Phyllis Caldwell, supra note 143. 295Treasury conversations with Panel staff (Oct. 21, 2010). 296Testimony of Phyllis Caldwell, supra note 143 (‘‘KAUFMAN: So you’re not sending anyone 

out to actually find out whether they hold the mortgages? . . . [O]r any kind of physical (ph) 

follow-up on the fact that there are mortgages out there—do they actually have the mortgages 

and they actually have title to the land that they are trying to foreclose on? CALDWELL: At 

this point, we are supporting all of the agencies that are doing investigations of those servicers, 

including the GSEs, and are monitoring closely, and will take follow-up action when there are 

facts that we get from those reviews. KAUFMAN: So . . . Treasury’s not doing anything independently to determine that mortgages modified under HAMP have all necessary loan documentation and a clear chain of title? You’re just taking the word of the people—of the folks at 

the banks and financial institutions you’re dealing with that they do have a—they have loan 

documentation and a clear chain of title? . . . CALDWELL: . . . I think that . . . it’s an important issue and something that . . . at least at this point in time . . . we’re looking at the foreclosure prevention process separate from the actual foreclosure sale process. And to modify a 

mortgage, there is not a need to have clear title. . . . you need information from the note, but 

you don’t need a physical note to modify a mortgage.’’). See also Treasury conversations with 

Panel staff (Oct. 21, 2010). 297Testimony of Phyllis Caldwell, supra note 143. 298Treasury conversations with Panel staff (Oct. 21, 2010). 299Testimony of Phyllis Caldwell, supra note 143. 

closure value, then the servicer must offer the borrower a modification. 

Treasury asserts that the foreclosure irregularities have no direct 

impact on HAMP. With regard to false affidavits, Phyllis Caldwell, 

chief of Treasury’s Homeownership Preservation Office, noted that 

HAMP is a foreclosure-prevention program and therefore is separate from the actual foreclosure sale process. As a result, HAMP 

‘‘is not directly affected by ‘robo-signers’ or false affidavits filed 

with state courts.’’ 293

With regard to the issues around the transfer of ownership of the 

mortgage, Ms. Caldwell testified that ‘‘to modify a mortgage, there 

is not a need to have clear title.’’ 294 In addition, Treasury stated 

that it has not reviewed mortgage ownership transfer issues because the modifications are private contracts between the servicer 

and the borrower.295 Perhaps as a result, Treasury is not doing 

anything independently to determine if the mortgages the servicers 

in HAMP are modifying have been properly transferred into the 

trusts the servicers represent. It is supporting other agencies in 

their efforts, but is taking no action on its own.296 According to Ms. 

Caldwell, there is an ‘‘assumption that the servicer is following the 

laws. [ . . .] If we learn something after the fact that contradicts 

that, we do have the ability to go in and claw back the incentive.’’ 297 Treasury echoed this opinion in conversations with Panel 

staff.298

The Panel questions Treasury’s position that HAMP is unaffected 

by the foreclosure irregularities. Although it is difficult to assess 

the exact consequences of the foreclosure documentation crisis on 

HAMP at this point, there are several strong potential links which 

Treasury should carefully consider. For example, if trusts have not 

properly received ownership of the mortgage, they may not be the 

legal owner of the mortgage. If the trust does not own the mortgage, the servicer cannot foreclose on it, and HAMP, a foreclosure 

prevention program, is paying incentives to parties with no legal 

right to foreclose. At present, Treasury has no way to determine if 

such payments are being made.299 Treasury may well be paying incentives to servicers that have no right to receive them. 

Treasury has justified its relative inaction by noting that if ownership of the mortgage has not been properly transferred, the legal 


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300Treasury conversations with Panel staff (Oct. 21, 2010). 301Treasury conversations with Panel staff (Oct. 21, 2010). 302Written Testimony of Katherine Porter, supra note 14, at 8. 303 It is unclear what would happen if the true owner were also in HAMP. Under the HAMP 

standards, the individual servicer should not matter, and a loan that qualified for a modification 

with one servicer should qualify with another. The borrower, however, might have to reapply 

for a modification and enter a new trial modification. It is also possible that Treasury could facilitate the transfer and not require a borrower to reapply. 304Testimony of Phyllis Caldwell, supra note 143. 305See Sections D and F, supra. 

owner will eventually appear, and at that time, Treasury can claw 

back any incentive payments made to the wrong party.300 Such a 

solution, however, may not be feasible. It optimistically assumes 

that legal owners will be able to identify clearly the mortgages they 

own, despite all of the potential litigation and complex transactions 

many mortgages have been part of, and then navigate the bureaucracy to bring the matter before Treasury. Inevitably, not all legal 

owners will manage this, in which case Treasury will be giving 

money to parties that are not entitled to it. Moreover, if this is occurring, even in cases where the legal owners do come forward, 

Treasury is essentially providing interest-free loans to the wrong 

parties in the meantime. In addition, Treasury’s inactivity may 

give rise to a double standard in which borrowers must provide extensive documentation before benefiting from HAMP, while 

servicers are allowed public money without having to prove their 

right to foreclose. 

In addition, although Treasury maintains that HAMP is unaffected by transfer of mortgage ownership issues because modifications are private contracts between servicers and borrowers,301 a 

servicer cannot modify a loan unless it is authorized to do so by 

the mortgage’s actual owner.302 If legal owners then begin to come 

forward, as Treasury is relying on them to do in order to clarify incentive payments, the legal owners will not be bound by the modifications.303 Abruptly, borrowers would no longer benefit from the 

reduced interest rates of a HAMP modification. As a result, the 

length of time that a modification provides a borrower to recover 

and become current on payment, which Treasury cites as one of 

HAMP’s principal successes,304 would be cut short. Indeed, borrowers may even suffer penalties for not having been paying the 

monthly payments required prior to the modification. 

Another concern involves how HAMP servicers have been calculating the costs of foreclosure under the program’s NPV test. Foreclosures carry significant costs leading up to the acquisition of a 

property’s title. If, by cutting corners in the foreclosure process, 

servicers were able to lower the cost of foreclosure artificially, their 

own internal cost comparison analysis might have differed from the 

official NPV analysis. In such instances, servicers would have an 

incentive to lose paperwork or otherwise deny modifications that 

they would be compelled to make under the program standards. 

Conversely, foreclosure irregularities could have the perverse effect of encouraging servicers to modify more loans through HAMP. 

If foreclosure irregularities lead to additional litigation and delays 

in foreclosure proceedings, they will increase the costs of foreclosure.305 Treasury may then update the HAMP NPV model to reflect these new realities. With the costs of foreclosure higher, the 


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NPV model will find more modifications to be NPV-positive, resulting in more HAMP modifications. 

I. Conclusion 

Allegations of documentation irregularities remain in flux, and 

their consequences remain uncertain. The best-case scenario, a possibility embraced by the financial services industry, is that current 

concerns over foreclosure irregularities are overblown, reflecting 

mere clerical errors that can and will be resolved quickly. If this 

view proves correct, then the irregularities might be fixed with little to no impact on HAMP or financial stability. 

The worst-case scenario, a possibility predominantly articulated 

by homeowners and plaintiffs’ lawyers, is considerably grimmer. In 

this view, the irregularities reflect extensive misbehavior on the 

part of banks and loan servicers that extends throughout the entire 

securitization process. Such problems could throw into question the 

enforceability of legal rights related to ownership of many loans 

that have been pooled and securitized. Given that 4.2 million homeowners are currently in default and facing potential foreclosure, including 729,000 who have been rejected from HAMP, the implications for the foreclosure market alone would be immense. Much 

larger, of course, would be the implications of such irregularities 

for the broader market in MBS, which totals $7.6 trillion in value. 

Losses related to documentation issues could be compounded by 

losses related to MBS investors exercising put-back rights due to 

poor underwriting of securitized loans. 

Several investigations of irregularities are now underway, including a review by the 50 states’ attorneys general; an investigation 

by the Federal Fraud Enforcement Task Force; an effort to review 

documentation for certain Countrywide loans led by PIMCO, 

BlackRock, and FRBNY; and numerous other inquiries by private 

investors. These and similar efforts may ultimately uncover the full 

extent of irregularities in mortgage loan originations, transfers, 

and foreclosures, but the final picture may not emerge for some 

time if these actions founder in protracted litigation. 

In the meantime, the Panel raises several concerns that policymakers should carefully consider as these issues evolve. 

Treasury Should Monitor Closely the Impact of Foreclosure Irregularities. Treasury so far has expressed relatively 

little concern that foreclosure irregularities could reflect deeper 

problems that would pose a threat to financial stability. According 

to Phyllis Caldwell, Chief of the Homeownership Preservation Office for Treasury, ‘‘We’re very closely monitoring any litigation risk 

to see if there is any systemic threat, but at this point, there’s no 

indication that there is [any threat].’’ This statement appears premature. Potential threats are by definition those that have not yet 

fully materialized, but their risks remain real. Despite assurances 

by banks and Treasury to the contrary, great uncertainty remains 

as to whether the stability of banks and the housing market might 

be at risk if the legal underpinnings of the real estate market 

should come into question. Treasury should closely monitor these 

issues as they develop, both for the sake of its foreclosure mitigation programs and for the overall health of the banking system, 

and Treasury should report its findings to the public and to ConVerDate Mar 15 2010 02:17 Dec 02, 2010 Jkt 061835 PO 00000 Frm 00074 Fmt 6602 Sfmt 6602 E:\HR\OC\A835.XXX A835

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gress. Further, Treasury should develop contingency plans to prepare for the potential worst-case scenario. 

Treasury and the Federal Reserve Should Stress Test 

Banks to Evaluate Their Ability to Weather a Crisis Related 

to Mortgage Irregularities. The potential for further instability 

among the largest banks raises the specter of another acute crisis 

like the one that hit the markets in the autumn of 2008. If investors come to doubt the entire process underlying securitizations, 

they may grow unwilling to lend money to even the largest banks 

without implicit or explicit assurances that taxpayers will bear any 

losses. Further, banks could, in the worst-case scenario, suffer severe direct capital losses due to put-backs. Bank of America holds 

$230.5 billion in equity, yet the PIMCO and FRBNY action alone 

could ultimately seek up to $47 billion in put-backs. If several similar-sized actions were to succeed, Bank of America could suffer a 

major dent in its regulatory capital. In effect, a bank forced to accept put-backs would be required to buy back troubled mortgage 

loans that in many cases had already defaulted or had been poorly 

underwritten. As the Panel has noted in the past, some major 

banks have had extensive exposure to troubled mortgage-related 

assets. Widespread put-backs could destabilize financial institutions that remain exposed and could lead to a precarious situation 

for those that were emerging from the crisis. Further, banks and 

loan servicers could be vulnerable to state-based class-action lawsuits initiated by homeowners who claim to have suffered improper 

foreclosures. Even the prospect of such losses could damage a 

bank’s stock price or its ability to raise capital. 

The Panel has recommended in the past that, when policymakers 

are faced with uncertain economic or financial conditions, they 

should employ ‘‘stress tests’’ as part of the regular bank supervisory process to identify possible outcomes and to measure the 

robustness of the financial system. Treasury and the Federal Reserve last conducted comprehensive stress tests in 2009, but because those tests predated the current concerns about documentation irregularities and projected banks’ capitalization only through 

the end of 2010, they offer limited reassurance that major banks 

could survive further shocks in the months and years to come. Federal banking regulators should re-run stress tests on the largest 

banks and on at least a sampling of smaller institutions, using realistic macroeconomic and housing price projections and stringent 

assumptions about realistic worst-case scenario bank losses. Any 

assumptions about the ultimate costs of documentation irregularities would be necessarily speculative and the contours of the problem are still murky. Stress tests may therefore need to account for 

a wide range of possibilities and acknowledge their own limitations. 

Such testing, however, would nonetheless illuminate the robustness 

of the financial system and help prepare for a worst-case scenario. 

Policymakers Should Evaluate System-Wide Consequences 

of Documentation Irregularities. As disturbing as the potential 

implications of documentation irregularities may be for ‘‘too big to 

fail’’ banks, the consequences would not be limited to the largest 

banks in the market. Among other concerns: 

• Fannie Mae and Freddie Mac Present Significant Risks. 

Already Fannie Mae and Freddie Mac play an enormous role 


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in the market for MBS. If investors develop new concerns 

about the safety of the MBS market, then Fannie and 

Freddie—backed by their government guarantee—could be 

forced to maintain or even expand their dominant role for 

years to come. Because the American people ultimately stand 

behind every guarantee made by these companies, the result 

could be greater and prolonged financial risk to taxpayers. • Homeowners May Lose Confidence in the Housing Market. Buyers and sellers, in foreclosure or otherwise, may find 

themselves unable to know with any certainty whether they 

can safely buy or safely sell a home. Widespread loss of confidence in clear ownership of mortgage loans would throw further sand in the gears of the already troubled housing market—especially since 31 percent of the homes currently on the 

market are foreclosure sales, which may already have undergone an improper legal process. • Public Faith in Due Process Could Suffer. If the public 

gains the impression that the government is providing concessions to large banks in order to ensure the smooth processing 

of foreclosures, the people’s fundamental faith in due process 

could suffer. 

In short, actions by some of the largest financial institutions may 

have the potential to threaten the still-fragile economy. The risk is 

uncertain, but the danger is significant enough that Treasury and 

all other government agencies with a role to play in the mortgage 

market must focus on preventing another such shock. 


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306See Appendix I of this report, infra. 

SECTION TWO: CORRESPONDENCE WITH TREASURY 

The Panel’s Chairman, Senator Ted Kaufman, sent a letter on 

behalf of the Panel on November 1, 2010 to Patricia Geoghegan, 

the Special Master for TARP Executive Compensation under 

EESA.306 The letter presents a series of questions to the Special 

Master, requesting additional information and data following the 

Panel’s October 21, 2010 hearing on TARP and executive compensation. 


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SECTION THREE: TARP UPDATES SINCE LAST REPORT 

A. GM To Repurchase AIFP Preferred Stock 

On October 27, 2010, Treasury accepted an offer by General Motors Company (New GM) to repurchase 83.9 million shares of New 

GM’s Series A preferred stock at $25.50 per share provided that 

the company’s proposed initial public offering (IPO) is completed. 

These preferred shares were issued, along with 60.8 percent of the 

company’s common stock, in July 2009 in exchange for extinguishing the debtor-in-possession loan extended to General Motors 

Corporation (Old GM). The repurchase price represents 102 percent 

of the liquidation preference. After the IPO is completed, New GM 

will repurchase the Series A preferred shares on the first dividend 

payment date of the preferred stock. Following this transaction, 

Treasury’s total return from New GM through debt repayments, 

the preferred stock repurchase, and interest and dividends will 

total $9.5 billion. 

B. AIG: AIA Initial Public Offering and ALICO Sale 

As part of its plan to repay the federal government’s outstanding 

investments, AIG completed an IPO for AIA Group Limited (AIA) 

and sold American Life Insurance Company (ALICO) to MetLife, 

Inc. The AIA IPO raised $20.5 billion in cash proceeds and the 

ALICO sale generated $16.2 billion in total proceeds. Of this 

amount, $7.2 billion represents cash proceeds. The $36.7 billion in 

aggregate proceeds will be used to pay down the outstanding balance on the revolving credit facility from FRBNY. 

C. Sales of Citigroup Common Stock 

On October 19, 2010, Treasury began a fourth period of sales for 

1.5 billion shares of Citigroup common stock. Treasury received 7.7 

billion common shares in July 2009 in exchange for its initial $25 

billion investment in the company under the CPP. As of October 

29, 2010, Treasury has sold 4.1 billion shares (approximately fifty 

percent of its stake) for $16.4 billion in gross proceeds. Of this 

amount, approximately $13.4 billion represents a repayment for 

Citigroup’s CPP funding, while the remaining $3 billion represents 

a net profit for taxpayers. Morgan Stanley will act as Treasury’s 

sales agent for the fourth selling period, which will end on December 31, 2010 or upon the sale of the full allotment of 1.5 billion 

shares. 

D. Legacy Securities Public-Private Investments Program 

Quarterly Report 

On October 20, 2010, Treasury released its fourth quarterly report on the Legacy Securities Public-Private Investments Program 

(PPIP). This program is intended to support market functioning 

and facilitate price discovery in MBS markets through equity and 

debt capital commitments in eight public-private investment funds 

(PPIFs). As of September 30, 2010, the purchasing power of these 


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307The total purchasing power published in the PPIP quarterly report does not include the 

purchasing power within UST/TCW Senior Mortgage Services Fund, L.P., which was wound up 

and liquidated on January 4, 2010. See endnote xlvi, infra, for details on the liquidation of this 

fund. U.S. Department of the Treasury, Legacy Securities Public-Private Investment Program, 

at 3 (Oct. 20, 2010) (online at financialstability.gov/docs/External%20Report%20-%2009- 

10%20vFinal.pdf). 308 Bureau of Economic Analysis, Table 1.1.6.: Real Gross Domestic Product, Chained Dollars 

(online at www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=6&Freq=Qtr&FirstYear= 

2008&LastYear=2010) (hereinafter ‘‘Bureau of Economic Analysis Table 1.1.6’’) (accessed Nov. 

3, 2010). Until the year-over-year decrease from 2007 to 2008, nominal GDP had not decreased 

on an annual basis since 1949. Bureau of Economic Analysis, Table 1.1.5.: Gross Domestic Product (online at www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&Freq=Qtr&First 

Year=2008&LastYear=2010) (accessed Nov. 3, 2010). 309The Economics and Statistics Administration within the U.S. Department of Commerce estimated that the spending associated with the 2010 Census would peak in the second quarter 

of 2010 and could boost annualized nominal and real GDP growth by 0.1 percent in the first 

quarter of 2010 and 0.2 percent in the second quarter of 2010. As the boost from the Census 

is a one-time occurrence, continuing increases in private investment and personal consumption 

expenditures as well as in exports will be needed to sustain the resumption of growth that has 

occurred in the U.S. economy over the past year. It was expected that the drop in 2010 Census 

spending would then reduce GDP growth by similar amounts in Q3 and Q4 2010. Economics 

and Statistics Administration, U.S. Department of Commerce, The Impact of the 2010 Census 

Operations on Jobs and Economic Growth, at 8 (online at www.esa.doc.gov/02182010.pdf). 

funds totaled $29.4 billion.307 Of this amount, $7.4 billion represents equity commitments from private-sector fund managers 

and investors and $22.1 billion represents both debt and equity 

commitments from Treasury. The total market value of securities 

held by participating PPIFs was approximately $19.3 billion, with 

82 percent of investments concentrated in non-agency RMBS and 

18 percent in commercial mortgage-backed securities (CMBS). 

To date, cumulative gross unrealized equity gains for both Treasury and private investors total $1.5 billion. The net internal rate 

of return for each PPIF is currently between 19.3 percent and 52.0 

percent. 

E. Metrics 

Each month, the Panel’s report highlights a number of metrics 

that the Panel and others, including Treasury, the Government Accountability Office (GAO), Special Inspector General for the Troubled Asset Relief Program (SIGTARP), and the Financial Stability 

Oversight Board, consider useful in assessing the effectiveness of 

the Administration’s efforts to restore financial stability and accomplish the goals of EESA. This section discusses changes that have 

occurred in several indicators since the release of the Panel’s October 2010 report. 

1. Macroeconomic Indices 

The post-crisis rate of real GDP growth quarter-over-quarter 

peaked at an annual rate of 5 percent in the fourth quarter of 

2009, but the rate has decreased during 2010. Real GDP increased 

at an annualized rate of 2.0 percent in the third quarter of 2010, 

increasing from 1.7 percent in the second quarter of 2010.308 The 

third quarter growth rate was unaffected by the spike in employment resulting from the 2010 U.S. Census.309 The year-over-year 

increase from third quarter 2009 to third quarter 2010 was 3.1 percent, from 12.9 billion to 13.3 billion dollars. 


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310 Bureau of Economic Analysis Table 1.1.6, supra note 308 (accessed Nov. 3, 2010). 311 It is important to note that the measures of unemployment and underemployment do not 

include people who have stopped actively looking for work altogether. While the Bureau of Labor 

Statistics (BLS) does not have a distinct metric for ‘‘underemployment,’’ the U–6 category of 

Table A–15 ‘‘Alternative Measures of Labor Underutilization’’ is used here as a proxy. BLS defines this measure as: ‘‘Total unemployed, plus all persons marginally attached to the labor 

force, plus total employed part time for economic reasons, as a percent of the civilian labor force 

plus all persons marginally attached to the labor force.’’ U.S. Department of Labor, International 

Comparisons of Annual Labor Force Statistics (online at www.bls.gov/webapps/legacy/ 

cpsatab15.htm) (accessed Nov. 3, 2010). 

FIGURE 13: REAL GDP 310

Since the Panel’s October report, underemployment has increased from 16.7 percent to 17.1 percent, while unemployment has 

remained constant. Median duration of unemployment has increased by half a week. 

FIGURE 14: UNEMPLOYMENT, UNDEREMPLOYMENT, AND MEDIAN DURATION OF 

UNEMPLOYMENT 311


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312Federal Reserve Bank of St. Louis, Series STLFSI: Business/Fiscal: Other Economic Indi- cators (Instrument: St. Louis Financial Stress Index, Frequency: Weekly) (online at research.stlouisfed.org/fred2/series/STLFSI) (accessed Nov. 3, 2010). The index includes 18 weekly 

data series, beginning in December 1993 to the present. The series are: effective federal funds 

rate, 2-year Treasury, 10-year Treasury, 30-year Treasury, Baa-rated corporate, Merrill Lynch 

High Yield Corporate Master II Index, Merrill Lynch Asset-Backed Master BBB-rated, 10-year 

Treasury minus 3-month Treasury, Corporate Baa-rated bond minus 10-year Treasury, Merrill 

Lynch High Yield Corporate Master II Index minus 10-year Treasury, 3-month LIBOR-OIS 

spread, 3-month TED spread, 3-month commercial paper minus 3-month Treasury, the J.P. Morgan Emerging Markets Bond Index Plus, Chicago Board Options Exchange Market Volatility 

Index, Merrill Lynch Bond Market Volatility Index (1-month), 10-year nominal Treasury yield 

minus 10-year Treasury Inflation Protected Security yield, and Vanguard Financials ExchangeTraded Fund (equities). The index is constructed using principal components analysis after the 

data series are de-meaned and divided by their respective standard deviations to make them 

comparable units. The standard deviation of the index is set to 1. For more details on the construction of this index, see Federal Reserve Bank of St. Louis, National Economic Trends Appendix: The St. Louis Fed’s Financial Stress Index (Jan. 2010) (online at research.stlouisfed.org/publications/net/NETJan2010Appendix.pdf). 

2. Financial Indices 

a. Overview 

Since the Panel’s October report, the St. Louis Financial Stress 

Index, a proxy for financial stress in the U.S. economy, has continued its downward trend, decreasing by a quarter.312 The index has 

fallen by over half since the post-crisis peak in June 2010. The recent trend in the index suggests that financial stress continues 

moving toward its long-run norm. The index has decreased by more 

than three standard deviations since October 2008, the month 

when the TARP was initiated. 

FIGURE 15: ST. LOUIS FEDERAL RESERVE FINANCIAL STRESS INDEX 

Stock market volatility has decreased recently. The Chicago 

Board Options Exchange Volatility Index (VIX) has fallen by more 

than half since the post-crisis peak in May 2010 and has fallen 7 

percent since the Panel’s October report. However, volatility is still 

40 percent higher than its post-crisis low on April 12, 2010. 


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313Data accessed through Bloomberg data service on November 3, 2010. The CBOE VIX is 

a key measure of market expectations of near-term volatility. Chicago Board Options Exchange, 

The CBOE Volatility Index—VIX, 2009 (online at www.cboe.com/micro/vix/vixwhite.pdf) 

(accessed Nov. 3, 2010). 314Data accessed through Bloomberg data service on November 3, 2010. 317 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release 

H.15: Selected Interest Rates: Historical Data (Instrument: Conventional Mortgages, Frequency: 

Weekly) (online at www.federalreserve.gov/releases/h15/data/Weekly_Thursday/ 

H15_MORTG_NA.txt) (hereinafter ‘‘Federal Reserve Statistical Release H.15’’) (accessed Nov. 3, 

2010). 

FIGURE 16: CHICAGO BOARD OPTIONS EXCHANGE VOLATILITY INDEX 313

b. Interest Rates, Spreads, and Issuance 

As of November 3, 2010, the 3-month and 1-month London Interbank Offer Rates (LIBOR), the prices at which banks lend and borrow from each other, were 0.29 and 0.25, respectively.314 Rates 

have fallen by nearly half since post-crisis highs in June 2010 and 

have remained nearly constant since the Panel’s October report. 

Over the longer term, however, interest rates remain extremely low 

relative to pre-crisis levels, indicating both efforts of central banks 

and institutions’ perceptions of reduced risk in lending to other 

banks. 

FIGURE 17: 3-MONTH AND 1-MONTH LIBOR RATES (AS OF NOVEMBER 3, 2010) 

Indicator Current Rates 

(as of 11/3/2010) 

Percent Change from Data 

Available at Time of Last Report (10/4/2010) 

3-Month LIBOR 315 ............................................................... 0.29 (1.6) 

1-Month LIBOR 316 ............................................................... 0.25 (1.2) 

315 Data accessed through Bloomberg data service on November 3, 2010. 316 Data accessed through Bloomberg data service on November 3, 2010. 

Since the Panel’s October report, interest rate spreads have decreased slightly. Thirty-year mortgage interest rates have decreased very slightly and 10-year Treasury bond yields have increased very slightly. The conventional mortgage spread, which 

measures the 30-year mortgage rate over 10-year Treasury bond 

yields, has decreased slightly since late September.317

The TED spread serves as an indicator for perceived risk in the 

financial markets. While it has increased by about three basis 

points since the Panel’s October report, the spread is still currently 


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318Federal Reserve Bank of Minneapolis, Measuring Perceived Risk—The TED Spread (Dec. 

2008) (online at www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4120). 319Data accessed through Bloomberg data service on November 3, 2010. 320Data accessed through Bloomberg data service on November 3, 2010. 321Data accessed through Bloomberg data service on November 3, 2010. 

lower than pre-crisis levels.318 The LIBOR–OIS spread reflects the 

health of the banking system. While it increased over threefold 

from early April to July, it has been falling since mid-July and is 

now averaging pre-crisis levels.319 LIBOR–OIS remained fairly constant since the Panel’s October report. Decreases in the LIBOR– 

OIS spread and the TED spread suggest that hesitation among 

banks to lend to counterparties has receded. 

FIGURE 18: TED SPREAD 320

FIGURE 19: LIBOR–OIS SPREAD 321

The interest rate spread for AA asset-backed commercial paper, 

which is considered mid-investment grade, has fallen by more than 

a tenth since the Panel’s October report. The interest rate spread 


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on A2/P2 commercial paper, a lower grade investment than AA 

asset-backed commercial paper, has fallen by nearly 11 percent 

since the Panel’s October report. This indicates healthier fundraising conditions for corporations. 

FIGURE 20: INTEREST RATE SPREADS 

Indicator Current Spread 

(as of 11/1/2010) 

Percent Change 

Since Last Report 

(9/30/2010) 

Conventional mortgage rate spread 322 .................................................. 1.56 (13.3) 

TED Spread (basis points) ...................................................................... 15.59 20.0 

Overnight AA asset-backed commercial paper interest rate spread 323 0.07 (11.2) 

Overnight A2/P2 nonfinancial commercial paper interest rate 

spread 324 ............................................................................................ 0.14 (11.0) 

322 Federal Reserve Statistical Release H.15, supra note 317 (accessed Nov. 3, 2010); Board of Governors of the Federal Reserve System, 

Federal Reserve Statistical Release H.15: Selected Interest Rates: Historical Data (Instrument: U.S. Government Securities/Treasury Constant 

Maturities/Nominal 10-Year, Frequency: Weekly) (online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/H15_TCMNOM_Y10.txt) 

(accessed Nov. 3, 2010). 323 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data 

Download Program (Instrument: AA Asset-Backed Discount Rate, Frequency: Daily) (online at 

www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Nov. 3, 2010); Board of Governors of the Federal Reserve System, Federal 

Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data Download Program (Instrument: AA Nonfinancial Discount Rate, 

Frequency: Daily) (online at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Nov. 3, 2010). In order to provide a more 

complete comparison, this metric utilizes the average of the interest rate spread for the last five days of the month. 324 Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data 

Download Program (Instrument: A2/P2 Nonfinancial Discount Rate, Frequency: Daily) (online at 

www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed Nov. 3, 2010). In order to provide a more complete comparison, this metric utilizes the average of the interest rate spread for the last five days of the month. 

The spread between Moody’s Baa Corporate Bond Yield Index 

and 30-year constant maturity U.S. Treasury Bond yields doubled 

from late April to mid-June 2010. Spreads have trended down since 

mid-June highs and have fallen over 6 percent since the Panel’s 

October report. This spread indicates the difference in perceived 

risk between corporate and government bonds, and a declining 

spread could indicate waning concerns about the riskiness of corporate bonds. 


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325Federal Reserve Bank of St. Louis, Series DGS30: Selected Interest Rates (Instrument: 30- 

Year Treasury Constant Maturity Rate, Frequency: Daily) (online at research.stlouisfed.org/ 

fred2/) (hereinafter ‘‘Federal Reserve Bank of St. Louis Series DGS30’’) (accessed Nov. 3, 2010). 

Corporate Baa rate data accessed through Bloomberg data service on November 3, 2010. 326Securities Industry and Financial Markets Association, U.S. Corporate Bond Issuance (online at www.sifma.org/uploadedFiles/Research/Statistics/StatisticsFiles/Corporate-US-CorporateIssuance-SIFMA.xls) (accessed Nov. 3, 2010). 327For the purposes of its analysis, the Panel uses four categories based on bank asset sizes: 

Large banks (those with over $100 billion in assets), medium banks (those with between $10 

billion and $100 billion in assets), smaller banks (those with between $1 billion and $10 billion 

in assets), and smallest banks (those with less than $1 billion in assets). 

FIGURE 21: MOODY’S BAA CORPORATE BOND INDEX AND 30-YEAR U.S. TREASURY 

YIELD 325

Corporate bond market issuance data corroborate this analysis, 

with investment grade issuance increasing over 50 percent between 

August and September 2010.326

c. Condition of the Banks 

Since the Panel’s last report, 10 additional banks have failed, 

with an approximate total asset value of $4.2 billion. With 139 failures from January through October 2010, the year-to-date rate has 

nearly reached 140, the level for all of calendar year 2009. In general, banks failing in 2009 and 2010 have been small- and mediumsized institutions; 327 while they are failing in high numbers, their 

aggregate asset size has been relatively small. 


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328The disparity between the number of and total assets of failed banks in 2008 is driven pri- marily by the failure of Washington Mutual Bank, which held $307 billion in assets. The 2010 

year-to-date percentage of bank failures includes failures through August. The total number of 

FDIC-insured institutions as of March 31, 2010 is 7,932 commercial banks and savings institutions. As of November 12, 2010, there have been 143 institutions that failed. Federal Deposit 

Insurance Corporation, Failures and Assistance Transactions (online at www2.fdic.gov/hsob/ 

SelectRpt.asp?EntryTyp=30) (accessed Nov. 12, 2010). Asset totals have been adjusted for deflation into 2005 dollars using the GDP implicit price deflator. The quarterly values were averaged 

into a yearly value. Federal Reserve Bank of St. Louis Series DGS30, supra note 325 (accessed 

Nov. 3, 2010). 329 RealtyTrac Press Release on Foreclosure Activity, supra note 278. 330 Hardest-hit cities are defined as those in California, Florida, Nevada, and Arizona. Chicago, Houston, and Seattle posted the largest increases in foreclosure activity. RealtyTrac, Third 

Quarter Foreclosure Activity Up in 65 Percent of U.S. Metro Areas But Down in Hardest-Hit Cities (Oct. 28, 2010) (online at www.realtytrac.com/content/press-releases/third-quarter-foreclosure-activity-up-in-65-percent-of-us-metro-areas-but-down-in-hardest-hit-cities-6127). 331Sales of new homes in May 2010 were 276,000, the lowest rate since 1963. It should be 

noted that this number likely reflects a shifting of sales from May to April prompted by the 

April expiration of tax credits designed to boost home sales. U.S. Census Bureau and U.S. Department of Housing and Urban Development, New Residential Sales in June 2010 (July 26, 

2010) (online at www.census.gov/const/newressales.pdf); U.S. Census Bureau, New Residential 

Sales—New One-Family Houses Sold (online at www.census.gov/ftp/pub/const/sold_cust.xls) 

(accessed Nov. 3, 2010). 332The most recent data available is for July 2010. See Standard and Poor’s, S&P/CaseShiller Home Price Indices (Instrument: Case-Shiller 20-City Composite Seasonally Adjusted, 

Frequency: Monthly) (online at www.standardandpoors.com/indices/sp-case-shiller-home-price-inFIGURE 22: BANK FAILURES AS A PERCENTAGE OF TOTAL BANKS AND BANK FAILURES 

BY TOTAL ASSETS (1990–2010) 328

3. Housing Indices 

Foreclosure actions, which consist of default notices, scheduled 

auctions, and bank repossessions, increased 2.5 percent in September to 347,420. This metric is over 24 percent above the foreclosure action level at the time of the EESA enactment.329 While 

the hardest hit states still account for 19 out of 20 of the highest 

metro foreclosure rates, foreclosure activity grew less in the hardest-hit cities than in other states.330 Sales of new homes increased 

to 307,000, but remain low.331 The Case-Shiller Composite 20-City 

Composite decreased very slightly, while the FHFA Housing Price 

Index increased very slightly in August 2010. The Case-Shiller and 

FHFA indices are 6 percent and 5 percent, respectively, below their 

levels of October 2008.332


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dices/en/us/?indexId=spusa-cashpidff- -p-us- - - -) (hereinafter ‘‘S&P/Case-Shiller Home Price Indices’’) (accessed Nov. 3, 2010); Federal Housing Finance Agency, U.S. and Census Division 

Monthly Purchase Only Index (Instrument: USA, Seasonally Adjusted) (online at www.fhfa.gov/ 

Default.aspx?Page=87) (hereinafter ‘‘U.S. and Census Division Monthly Purchase Only Index’’) 

(accessed Nov. 3, 2010). S&P has cautioned that the seasonal adjustment is probably being distorted by irregular factors. These factors could include distressed sales and the various government programs. See Standard and Poor’s, S&P/Case-Shiller Home Price Indices and Seasonal 

Adjustment, S&P Indices: Index Analysis (Apr. 2010). For a discussion of the differences between the Case-Shiller Index and the FHFA Index, see April 2010 Ovesright Report, supra note 

282, at 98. 333 A Metropolitan Statistical Area is defined as a core area containing a substantial population nucleus, together with adjacent communities having a high degree of economic and social 

integration with the core. U.S. Census Bureau, About Metropolitan and Micropolitan Statistical 

Areas (online at www.census.gov/population/www/metroareas/aboutmetro.html) (accessed Nov. 3, 

2010). 334Data accessed through Bloomberg data service on November 3, 2010. The Case-Shiller Futures contract is traded on the CME and is settled to the Case-Shiller Index two months after 

the previous calendar quarter. For example, the February contract will be settled against the 

spot value of the S&P Case-Shiller Home Price Index values representing the fourth calendar 

quarter of the previous year, which is released in February one day after the settlement of the 

contract. Note that most close observers believe that the accuracy of these futures contracts as 

forecasts diminishes the farther out one looks. 

Additionally, Case-Shiller futures prices indicate a market expectation that home-price values for the major Metropolitan Statistical 

Areas 333 (MSAs) will hold constant through 2011.334 These futures 

are cash-settled to a weighted composite index of U.S. housing 

prices in the top ten MSAs, as well as to those specific markets. 

They are used to hedge by businesses whose profits and losses are 

related to any area of the housing industry, and to balance portfolios by businesses seeking exposure to an uncorrelated asset 

class. As such, futures prices are a composite indicator of market 

information known to date and can be used to indicate market expectations for home prices. 

FIGURE 23: HOUSING INDICATORS 

Indicator Most Recent 

Monthly Data 

Percent Change 

from Data Available 

at Time of Last 

Report 

Percent 

Change Since 

October 2008 

Monthly foreclosure actions 335 ...................................... 347,420 2 .5 24 .3 

S&P/Case-Shiller Composite 20 Index 336 ...................... 146 .99 (0 .3) (5 .9) 

FHFA Housing Price Index 337 ......................................... 192 .83 0 .4 (4 .5) 

335 RealtyTrac, Foreclosures (online at www.realtytrac.com/home/) (accessed Nov. 3, 2010). The most recent data available is for September 

2010. 336 S&P/Case-Shiller Home Price Indices, supra note 332 (accessed Nov. 3, 2010). The most recent data available is for August 2010. 337 U.S. and Census Division Monthly Purchase Only Index, supra note 332 (accessed Nov. 3, 2010). The most recent data available is for 

August 2010. 


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338 All data normalized to 100 at January 2000. Futures data accessed through Bloomberg 

data service on November 3, 2010. S&P/Case-Shiller Home Price Indices, supra note 332 

(accessed Nov. 3, 2010). 339 U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report 

as of September 30, 2010 (Oct. 11, 2010) (online at financialstability.gov/docs/dividends-interestreports/September%202010%20Dividends%20&%20Interest%20Report.pdf) (hereinafter ‘‘Treasury Cumulative Dividends, Interest and Distributions Report); U.S. Department of the Treasury, 

Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010 (Nov. 

2, 2010) (online at financialstability.gov/docs/transaction-reports/10-4- 

10%20Transactions%20Report%20as%20of%209-30-10.pdf) (hereinafter ‘‘Treasury Transactions 

Report’’). 340The original $700 billion TARP ceiling was reduced by $1.26 billion as part of the Helping 

Families Save Their Homes Act of 2009. 12 U.S.C. § 5225(a)–(b); Helping Families Save Their 

Homes Act of 2009, Pub. L. No. 111–22 § 40. On June 30, 2010, the House-Senate Conference Committee agreed to reduce the amount authorized under the TARP from $700 billion to $475 

billion as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that was 

signed into law on July 21, 2010. See Dodd-Frank Wall Street Reform and Consumer Protection 

Act, Pub. L. No. 111–203 (2010); The White House, Remarks by the President at Signing of 

Dodd-Frank Wall Street Reform and Consumer Protection Act (July 21, 2010) (online at 

www.whitehouse.gov/the-press-office/remarks-president-signing-dodd-frank-wall-street-reformand-consumer-protection-act). 

FIGURE 24: CASE-SHILLER HOME PRICE INDEX AND FUTURES VALUES 338

F. Financial Update 

Each month, the Panel summarizes the resources that the federal government has committed to the rescue and recovery of the 

financial system. The following financial update provides: (1) An 

updated accounting of the TARP, including a tally of dividend income, repayments, and warrant dispositions that the program has 

received as of September 30, 2010; and (2) an updated accounting 

of the full federal resource commitment as of October 27, 2010. 

1. The TARP 

a. Program Updates 339

Treasury’s spending authority under the TARP officially expired 

on October 3, 2010. Though it can no longer make new funding 

commitments, Treasury can continue to provide funding for programs for which it has existing contracts and previous commitments. To date, $395.1 billion has been spent under the TARP’s 

$475 billion ceiling.340 Of the total amount disbursed, $209.5 billion has been repaid. Treasury has also incurred $6.1 billion in 


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341For its CPP investments in privately held financial institutions, Treasury also received 

warrants to purchase additional shares of preferred stock, which it exercised immediately. Similarly, Treasury also received warrants to purchase additional subordinated debt that were also 

immediately exercised along with its CPP investments in subchapter S corporations. Treasury 

Transactions Report, supra note 339, at 14. 342 U.S. Department of the Treasury, Capital Purchase Program (Oct. 3, 2010) (online at 

www.financialstability.gov/roadtostability/capitalpurchaseprogram.html). 343 U.S. Department of the Treasury, Targeted Investment Program (Oct. 3, 2010) (online at 

www.financialstability.gov/roadtostability/targetedinvestmentprogram.html). 344Treasury Cumulative Dividends, Interest and Distributions Report, supra note 339; Treasury Transactions Report, supra note 339. Treasury also received an additional $1.2 billion in 

participation fees from its Guarantee Program for Money Market Funds. U.S. Department of 

the Treasury, Treasury Announces Expiration of Guarantee Program for Money Market Funds 

(Sept. 18, 2009) (online at www.ustreas.gov/press/releases/tg293.htm). 

losses associated with its CPP and Automotive Industry Financing 

Program (AIFP) investments. A significant portion of the $179.7 

billion in TARP funds currently outstanding includes Treasury’s investments in AIG and assistance provided to the automotive industry. 

CPP Repayments 

As of October 29, 2010, 112 of the 707 banks that participated 

in the CPP have fully redeemed their preferred shares either 

through capital repayment or exchanges for investments under the 

Community Development Capital Initiative (CDCI). During the 

month of October, Treasury received a $12 million full repayment 

from 1st Constitution Bancorp, and a $100 million partial repayment from Webster Financial Corporation. A total of $152.9 billion 

has been repaid under the program, leaving $49.5 billion in funds 

currently outstanding. 

b. Income: Dividends, Interest, and Warrant Sales 

In conjunction with its preferred stock investments under the 

CPP and TIP, Treasury generally received warrants to purchase 

common equity.341 As of October 29, 2010, 45 institutions have repurchased their warrants from Treasury at an agreed upon price. 

Treasury has also sold warrants for 15 other institutions at auction. To date, income from warrant dispositions have totaled $8.1 

billion. 

In addition to warrant proceeds, Treasury also receives dividend 

payments on the preferred shares that it holds under the CPP, 5 

percent per annum for the first five years and 9 percent per annum 

thereafter.342 For preferred shares issued under the TIP, Treasury 

received a dividend of 8 percent per annum.343 In total, Treasury 

has received approximately $25.7 billion in net income from warrant repurchases, dividends, interest payments, and other proceeds 

deriving from TARP investments (after deducting losses).344 For 

further information on TARP profit and loss, see Figure 26. 


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c. TARP Accounting 

FIGURE 25: TARP ACCOUNTING (AS OF OCTOBER 29, 2010) 

[Dollars in billions] 

Program 

Maximum 

Amount 

Allotted 

Actual 

Funding 

Total 

Repayments/ 

Reduced 

Exposure 

Total 

Losses 

Funding 

Currently 

Outstanding 

Funding 

Available 

Capital Purchase Program 

(CPP) ................................ $204.9 $204.9 ii $(152 .9) iii $(2 .6) $49 .5 $0 

Targeted Investment Program (TIP) ........................ 40.0 40.0 (40 .0) 0 0 0 

Asset Guarantee Program 

(AGP) ................................ 5.0 iv 5.0 v (5 .0) 0 0 0 

AIG Investment Program 

(AIGIP) .............................. 69.8 vi 47.5 0 0 47 .5 22 .3 

Auto Industry Financing Program (AIFP) ...................... 81.3 81.3 (10 .8) vii (3 .5) viii 67 .1 0 

Auto Supplier Support Program (ASSP) ix ................. 0.4 0.4 (0 .4) 0 0 0 

Term Asset-Backed Securities Loan Facility (TALF) .. x 4.3 xi 0.1 0 0 0 .1 4 .2 

Public-Private Investment 

Program (PPIP) xii ............ 22.4 xiii 14.2 xiv (0 .4) 0 13 .8 8 .2 

SBA 7(a) Securities Purchase 0.4 xv 0.4 0 0 0 .4 xvi 0 

Home Affordable Modification Program (HAMP) ....... 29.9 0.6 0 0 0 .6 29 .3 

Hardest Hit Fund (HHF) ........ xvii 7.6 xviii 0.1 0 0 0 .1 7 .5 

FHA Refinance Program ....... 8.1 xix 0.1 0 0 0 .1 8 .0 

Community Development 

Capital Initiative (CDCI) .. 0.8 xx 0.6 0 0 0 .6 0 

Total ..................................... $475.0 $395.1 $(209 .5) $(6 .1) $179 .7 $79 .5 

iFigures affected by rounding. Unless otherwise noted, data in this table are from the following source: U.S. Department of the Treasury, 

Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). iiTotal amount repaid under CPP includes $13.4 billion Treasury received as part of its sales of Citigroup common stock. As of October 29, 

2010, Treasury had sold 4.1 billion Citigroup common shares for $16.4 billion in gross proceeds. Treasury has received $3 billion in net profit 

from the sale of Citigroup common stock. In June 2009, Treasury exchanged $25 billion in Citigroup preferred stock for 7.7 billion shares of 

the company’s common stock at $3.25 per share. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the 

Period Ending October 29, 2010, at 13–15 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S. Department of the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 25 (Oct. 2010) (online at 

www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf). 

Total CPP repayments also include amounts repaid by institutions that exchanged their CPP investments for investments under the CDCI, 

as well as proceeds earned from the sale of preferred stock and warrants issued by South Financial Group, Inc. and TIB Financial Corp. iii On the TARP Transactions Report, Treasury has classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million), as losses. In addition, Treasury sold its preferred ownership interests, along with warrants, in 

South Financial Group, Inc. and TIB Financial Corp. to non-TARP participating institutions. These shares were sold at prices below the value 

of the original CPP investment. Therefore, Treasury’s net current CPP investment is $49.5 billion due to the $2.6 billion in losses thus far. 

U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 13–14 (Nov. 

2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). iv The $5 billion AGP guarantee for Citigroup was unused since Treasury was not required to make any guarantee payments during the life of the program. U.S. Department of the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 31 (Oct. 2010) (online at 

www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf). v Although this $5 billion is no longer exposed as part of the AGP, Treasury did not receive a repayment in the same sense as with other 

investments. Treasury did receive other income as consideration for the guarantee, which is not a repayment and is accounted for in Figure 

26. vi AIG has completely utilized the $40 billion that was made available on November 25, 2008, in exchange for the company’s preferred 

stock. It has also drawn down $7.5 billion of the $29.8 billion made available on April 17, 2009. This figure does not include $1.6 billion in 

accumulated but unpaid dividends owed by AIG to Treasury due to the restructuring of Treasury’s investment from cumulative preferred shares 

to non-cumulative shares. AIG expects to draw down up to $22 billion in outstanding funds from the TARP as part of its plan to repay the 

revolving credit facility provided by the Federal Reserve Bank of New York. American International Group, Inc., Form 10–Q for the Fiscal Year 

Ended September 30, 2010, at 119 (Nov. 5, 2010) (online at sec.gov/Archives/edgar/data/5272/000104746910009269/a2200724z10-q.htm); 

American International Group, Inc., AIG Announces Plan To Repay U.S. Government (Sept. 30, 2010) (online at 

www.aigcorporate.com/newsroom/2010_September/AIGAnnouncesPlantoRepay30Sept2010.pdf); U.S. Department of the Treasury, Troubled Asset 

Relief Program Transactions Report for the Period Ending October 29, 2010, at 21 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). 


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vii On May 14, 2010, Treasury accepted a $1.9 billion settlement payment for its $3.5 billion loan to Chrysler Holding. The payment represented a $1.6 billion loss from the termination of the debt obligation. U.S. Department of the Treasury, Chrysler Financial Parent Company 

Repays $1.9 Billion in Settlement of Original Chrysler Loan (May 17, 2010) (online at www.financialstability.gov/latest/pr_05172010c.html). 

Also, following the bankruptcy proceedings for Old Chrysler, which extinguished the $1.9 billion debtor-in-possession (DIP) loan provided to Old 

Chrysler, Treasury retained the right to recover the proceeds from the liquidation of specified collateral. To date, Treasury has collected $40.2 

million in proceeds from the sale of collateral, and it does not expect a significant recovery from the liquidation proceeds. Treasury includes 

these proceeds as part of the $10.8 billion repaid under the AIFP. U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 

105(a) Report—September 2010 (Oct. 12, 2010) (online at financialstability.gov/docs/105CongressionalReports/September 105(a) report_FINAL.pdf); Treasury conversations with Panel staff (Aug. 19, 2010); U.S. Department of the Treasury, Troubled Asset Relief Program 

Transactions Report for the Period Ending October 29, 2010, at 18 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). viii On the TARP Transactions Report, the $1.9 billion Chrysler debtor-in-possession loan, which was extinguished April 30, 2010, was deducted from Treasury’s AIFP investment amount. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the 

Period Ending October 29, 2010, at 18 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). See note vii, supra, for details 

on losses from Treasury’s investment in Chrysler. ix On April 5, 2010, Treasury terminated its commitment to lend to the GM SPV under the ASSP. On April 7, 2010, it terminated its commitment to lend to the Chrysler SPV. In total, Treasury received $413 million in repayments from loans provided by this program ($290 million 

from the GM SPV and $123 million from the Chrysler SPV). Further, Treasury received $101 million in proceeds from additional notes associated with this program. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 

2010, at 19 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). x For the TALF program, one dollar of TARP funds was committed for every $10 of funds obligated by the Federal Reserve. The program 

was intended to be a $200 billion initiative, and the TARP was responsible for the first $20 billion in loan-losses, if any were incurred. The 

loan was incrementally funded. When the program closed in June 2010, a total of $43 billion in loans was outstanding under the TALF program, and the TARP’s commitments constituted $4.3 billion. The Federal Reserve Board of Governors agreed that it was appropriate for Treasury to reduce TALF credit protection from TARP to $4.3 billion. Board of Governors of the Federal Reserve System, Federal Reserve Announces 

Agreement With the Treasury Department Regarding a Reduction of Credit Protection Provided for the Term Asset-Backed Securities Loan Facility (TALF) (July 20, 2010) (online at www.federalreserve.gov/newsevents/press/monetary/20100720a.htm). xi As of October 27, 2010, Treasury had provided $105 million to TALF LLC. This total includes accrued payable interest. Federal Reserve 

Bank of New York, Factors Affecting Reserve Balances (H.4.1) (Oct. 28, 2010) (online at www.federalreserve.gov/releases/h41/20101028/). xii As of September 30, 2010, the total value of securities held by the PPIP managers was $19.3 billion. Non-agency Residential 

Mortgage-Backed Securities represented 82 percent of the total; CMBS represented the balance. U.S. Department of the Treasury, Legacy Securities Public-Private Investment Program, Program Update—Quarter Ended September 30, 2010, at 4 (Oct. 20, 2010) (online at 

financialstability.gov/docs/External%20Report%20-%2009-10%20vFinal.pdf). xiii U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report—September 2010, at 6 (Oct. 12, 2010) (online 

at financialstability.gov/docs/105CongressionalReports/September 105(a) report_FINAL.pdf). xiv As of October 29, 2010, Treasury has received $428 million in capital repayments from two PPIP fund managers. U.S. Department of the 

Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 23 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). xv As of October 29, 2010, Treasury’s purchases under the SBA 7(a) Securities Purchase Program totaled $324.9 million. U.S. Department of 

the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 22 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). xviTreasury will not make additional purchases pursuant to the expiration of its purchasing authority under EESA. U.S. Department of the 

Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 43 (Oct. 2010) (online at 

www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf). xvii As part of its revisions to TARP allocations upon enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Treasury allocated an additional $2 billion in TARP funds to mortgage assistance for unemployed borrowers through the Hardest Hit Fund (HHF). 

U.S. Department of the Treasury, Obama Administration Announces Additional Support for Targeted Foreclosure-Prevention Programs to Help 

Homeowners Struggling With Unemployment (Aug. 11, 2010) (online at www.ustreas.gov/press/releases/tg823.htm). Another $3.5 billion was allocated among the 18 states and the District of Columbia currently participating in HHF. The amount each state received during this round of 

funding is proportional to its population. U.S. Department of the Treasury, Troubled Asset Relief Program: Two Year Retrospective, at 72 (Oct. 

2010) (online at www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf). xviii As of November 10, 2010, a total of $63.6 million has been disbursed to seven state Housing Finance Agencies (HFAs). Data provided 

by Treasury staff (Nov. 10, 2010). xix This figure represents the amount Treasury disbursed to fund the advance purchase account of the letter of credit issued under the FHA 

Short Refinance Program. Data provided by Treasury staff (Nov. 10, 2010). xx Seventy-three Community Development Financial Institutions (CDFIs) entered the CDCI in September. Among these institutions, 17 banks 

exchanged their CPP investments for an equivalent investment amount under the CDCI. U.S. Department of the Treasury, Troubled Asset Relief 

Program Transactions Report for the Period Ending October 29, 2010, at 1–13, 16–17 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). Treasury closed the program 

on September 30, 2010, after investing $570 million in 84 CDFIs. U.S. Department of the Treasury, Treasury Announces Special Financial Stabilization Initiative Investments of $570 Million in 84 Community Development Financial Institutions in Underserved Areas (Sept. 30, 2010) 

(online at financialstability.gov/latest/pr_09302010b.html). 


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FIGURE 26: TARP PROFIT AND LOSS 

[Dollars in millions] 

TARP 

Initiative xxi

Dividends xxii

(as of 

9/30/2010) 

Interest xxiii

(as of 

9/30/2010) 

Warrant 

Disposition 

Proceeds xxiv

(as of 

10/29/2010) 

Other 

Proceeds 

(as of 

9/30/2010) 

Losses xxv

(as of 

10/29/2010) 

Total 

Total ......................... $16,721 $1,052 $8,160 $5,833 ($6,034) $25,732 

CPP ........................... 9,859 49 6,904 xxvi 3,015 (2,576) 17,250 

TIP ............................. 3,004 – 1,256 – – 4,260 

AIFP ........................... xxvii 3,418 931 – xxviii 15 (3,458) 906 

ASSP ......................... – 15 – xxix 101 – 116 

AGP ........................... 440 – – xxx 2,246 – 2,686 

PPIP .......................... – 56 – xxxi 180 – 236 

SBA 7(a) ................... – 1 – – – 1 

Bank of America 

Guarantee ............. – – – xxxii 276 – 276 

xxi AIG is not listed on this table because no profit or loss has been recorded to date for AIG. Its missed dividends were capitalized as 

part of the issuance of Series E preferred shares and are not considered to be outstanding. Treasury currently holds non-cumulative preferred 

shares, meaning AIG is not penalized for non-payment. Therefore, no profit or loss has been realized on Treasury’s AIG investment to date. xxii U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of September 30, 2010 (Oct. 12, 2010) (online at financialstability.gov/docs/dividends-interest-reports/September%202010%20Dividends%20&%20Interest%20Report.pdf). xxiii U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of September 30, 2010 (Oct. 12, 2010) 

(online at financialstability.gov/docs/dividends-interest-reports/September%202010%20Dividends%20&%20Interest%20Report.pdf). xxiv U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010 (Nov. 2, 

2010) (online at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). xxv In the TARP Transactions Report, Treasury classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific 

Coast National Bancorp ($4.1 million), as losses. Treasury has also sold its preferred ownership interests and warrants from South Financial 

Group, Inc. and TIB Financial Corp. This represents a $241.7 million loss on its CPP investments in these two banks. Two TARP recipients, 

UCBH Holdings, Inc. ($298.7 million) and a banking subsidiary of Midwest Banc Holdings, Inc. ($89.4 million), are currently in bankruptcy 

proceedings. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010 (Nov. 

2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). Finally, 

Sonoma Valley Bancorp, which received $8.7 million in CPP funding, was placed into receivership on August 20, 2010. Federal Deposit Insurance Corporation, Westamerica Bank, San Rafael, California, Assumes All of the Deposits of Sonoma Valley Bank, Sonoma, California (Aug. 20, 

2010) (online at www.fdic.gov/news/news/press/2010/pr10196.html). xxviThis figure represents net proceeds to Treasury from the sale of Citigroup common stock to date. For details on Treasury’s sales of 

Citigroup common stock, see note ii, supra. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period 

Ending October 29, 2010, at 15 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S. Department of the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 25 (Oct. 2010) (online at 

www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf). xxviiThis figure includes $815 million in dividends from GMAC preferred stock, trust preferred securities, and mandatory convertible preferred shares. The dividend total also includes a $748.6 million senior unsecured note from Treasury’s investment in General Motors. Data 

provided by Treasury. xxviiiTreasury received proceeds from an additional note connected with the loan made to Chrysler Financial on January 16, 2009. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 18 (Nov. 2, 2010) 

(online at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). xxix This represents the total proceeds from additional notes connected with Treasury’s investments in GM Supplier Receivables LLC and 

Chrysler Receivables SPV LLC. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 19 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). xxx As a fee for taking a second-loss position of up to $5 billion on a $301 billion pool of ring-fenced Citigroup assets as part of the AGP, Treasury received $4.03 billion in Citigroup preferred stock and warrants. Treasury exchanged these preferred stocks for trust preferred 

securities in June 2009. Following the early termination of the guarantee in December 2009, Treasury cancelled $1.8 billion of the trust preferred securities, leaving Treasury with $2.23 billion in Citigroup trust preferred securities. On September 30, 2010, Treasury sold these securi- ties for $2.25 billion in total proceeds. At the end of Citigroup’s participation in the FDIC’s TLGP, the FDIC may transfer $800 million of $3.02 billion in Citigroup Trust Preferred Securities it received in consideration for its role in the AGP to Treasury. U.S. Department of the 

Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 20 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S. Department of the Treas- ury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Citigroup Inc., Termination Agreement, at 1 (Dec. 23, 2009) (online at 

www.financialstability.gov/docs/Citi%20AGP%20Termination%20Agreement%20-%20Fully%20Executed%20Version.pdf); U.S. Department of the Treasury, Treasury Announces Further Sales of Citigroup Securities and Cumulative Return to Taxpayers of $41.6 Billion (Sept. 30, 2010) (online at financialstability.gov/latest/pr_09302010c.html); Federal Deposit Insurance Corporation, 2009 Annual Report, at 87 (June 30, 2010) (online at www.fdic.gov/about/strategic/report/2009annualreport/AR09final.pdf). xxxi As of September 30, 2010, Treasury has earned $159.1 million in membership interest distributions from the PPIP. Additionally, Treasury has earned $20.6 million in total proceeds following the termination of the TCW fund. See U.S. Department of the Treasury, Cumulative 

Dividends, Interest and Distributions Report as of September 30, 2010, at 14 (Oct. 12, 2010) (online at 

financialstability.gov/docs/dividends-interest-reports/September%202010%20Dividends%20&%20Interest%20Report.pdf); U.S. Department of the 

Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 23 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). xxxii Although Treasury, the Federal Reserve, and the FDIC negotiated with Bank of America regarding a similar guarantee, the parties

never reached an agreement. In September 2009, Bank of America agreed to pay each of the prospective guarantors a fee as though the 

guarantee had been in place during the negotiations period. This agreement resulted in payments of $276 million to Treasury, $57 million to 

the Federal Reserve, and $92 million to the FDIC. U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal 

Deposit Insurance Corporation, and Bank of America Corporation, Termination Agreement, at 1–2 (Sept. 21, 2009) (online at 

www.financialstability.gov/docs/AGP/BofA%20-%20Termination%20Agreement%20-%20executed.pdf). 


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345Treasury Cumulative Dividends, Interest and Distributions Report, supra note 339, at 20. 346Does not include banks with missed dividend payments that have either repaid all delinquent dividends, exited TARP, gone into receivership, or filed for bankruptcy. 347 Includes institutions that have either (a) fully repaid their CPP investment and exited the 

program or (b) entered bankruptcy or its subsidiary was placed into receivership. Treasury Cumulative Dividends, Interest and Distributions Report, supra note 339, at 20. 348 U.S. Department of the Treasury, Frequently Asked Questions Capital Purchase Program 

(CPP): Related to Missed Dividend (or Interest) Payments and Director Nomination (online at 

www.financialstability.gov/docs/CPP/CPP%20Directors%20FAQs.pdf) (accessed Nov. 12, 2010). 

d. CPP Unpaid Dividend and Interest Payments 345

As of September 30, 2010, 120 institutions have at least one dividend payment on preferred stock issued under CPP outstanding.346

Among these institutions, 95 are not current on cumulative dividends, amounting to $114.8 million in missed payments. Another 

25 banks have not paid $8 million in non-cumulative dividends. Of 

the $49.5 billion currently outstanding in CPP funding, Treasury’s 

investments in banks with non-current dividend payments total 

$3.5 billion. A majority of the banks that remain delinquent on dividend payments have under $1 billion in total assets on their balance sheets. Also, there are 21 institutions that no longer have outstanding unpaid dividends, after previously deferring their quarterly payments.347

Six banks have failed to make six dividend payments, while one 

bank has missed all seven quarterly payments. These institutions 

have received a total of $207.1 million in CPP funding. Under the 

terms of the CPP, after a bank fails to pay dividends for six periods, Treasury has the right to elect two individuals to the company’s board of directors.348 Figure 27 below provides further details on the distribution and the number of institutions that have 

missed dividend payments. 

In addition, eight CPP participants have missed at least one interest payment, representing $3.6 million in cumulative unpaid interest payments. Treasury’s total investments in these non-public 

institutions represent less than $1 billion in CPP funding. 


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350 Calculation of the internal rate of return (IRR) also includes CPP investments in public 

institutions not repaid in full (for reasons such as acquisition by another institution) in the 

Transaction Report, e.g., The South Financial Group and TIB Financial Corporation. The Panel’s 

total IRR calculation now includes CPP investments in public institutions recorded as a loss on 

the TARP Transaction Report due to bankruptcy, e.g., CIT Group Inc. Going forward, the Panel 

will continue to include losses due to bankruptcy when Treasury determines any associated contingent value rights have expired without value. When excluding CIT Group from the calculation, the resulting IRR is 10.4 percent. Treasury Transactions Report, supra note 339. 

FIGURE 27: CPP MISSED DIVIDEND PAYMENTS (AS OF SEPTEMBER 30, 2010) 349

Number of Missed Payments 1 2 3 4 5 6 7 Total 

Cumulative Dividends 

Number of Banks, by asset size 29 19 17 17 10 3 0 95 

Under $1B .......................... 20 15 12 11 5 1 0 64 

$1B–$10B .......................... 8 4 4 6 5 2 0 29 

Over $10B .......................... 1 0 1 0 0 0 0 2 

Non-Cumulative Dividends 

Number of Banks, by asset size 2 5 6 3 5 3 1 25 

Under $1B .......................... 1 5 5 3 5 3 1 23 

$1B–$10B .......................... 1 0 1 0 0 0 0 2 

Over $10B .......................... 0 0 0 0 0 0 0 0 

Total Missed Payments ............. .............. .............. .............. .............. .............. .............. .............. 120 

349 Treasury Cumulative Dividends, Interest and Distributions Report, supra note 339, at 17–20. Data on total bank assets compiled using 

SNL Financial data service. (accessed Nov. 3, 2010). 

e. Rate of Return 

As of November 4, 2010, the average internal rate of return for 

all public financial institutions that participated in the CPP and 

fully repaid the U.S. government (including preferred shares, dividends, and warrants) remained at 8.4 percent, as no institutions 

exited the program in October.350 The internal rate of return is the 

annualized effective compounded return rate that can be earned on 

invested capital. 


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f. Warrant Disposition 

FIGURE 28: WARRANT REPURCHASES/AUCTIONS FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY 

REPAID CPP FUNDS (AS OF NOVEMBER 4, 2010) 

Institution Investment 

Date 

Warrant 

Repurchase 

Date 

Warrant 

Repurchase/ 

Sale Amount 

Panel’s Best 

Valuation 

Estimate at 

Disposition 

Date 

Price/ 

Estimate 

Ratio 

IRR 

(Percent) 

Old National Bancorp ..................... 12/12/2008 5/8/2009 $1,200,000 $2,150,000 0 .558 9 .3 

Iberiabank Corporation ................... 12/5/2008 5/20/2009 1,200,000 2,010,000 0 .597 9 .4 

Firstmerit Corporation ..................... 1/9/2009 5/27/2009 5,025,000 4,260,000 1 .180 20 .3 

Sun Bancorp, Inc ............................ 1/9/2009 5/27/2009 2,100,000 5,580,000 0 .376 15 .3 

Independent Bank Corp. ................. 1/9/2009 5/27/2009 2,200,000 3,870,000 0 .568 15 .6 

Alliance Financial Corporation ........ 12/19/2008 6/17/2009 900,000 1,580,000 0 .570 13 .8 

First Niagara Financial Group ........ 11/21/2008 6/24/2009 2,700,000 3,050,000 0 .885 8 .0 

Berkshire Hills Bancorp, Inc. .......... 12/19/2008 6/24/2009 1,040,000 1,620,000 0 .642 11 .3 

Somerset Hills Bancorp .................. 1/16/2009 6/24/2009 275,000 580,000 0 .474 16 .6 

SCBT Financial Corporation ............ 1/16/2009 6/24/2009 1,400,000 2,290,000 0 .611 11 .7 

HF Financial Corp. .......................... 11/21/2008 6/30/2009 650,000 1,240,000 0 .524 10 .1 

State Street ..................................... 10/28/2008 7/8/2009 60,000,000 54,200,000 1 .107 9 .9 

U.S. Bancorp ................................... 11/14/2008 7/15/2009 139,000,000 135,100,000 1 .029 8 .7 

The Goldman Sachs Group, Inc. ..... 10/28/2008 7/22/2009 1,100,000,000 1,128,400,000 0 .975 22 .8 

BB&T Corp. ..................................... 11/14/2008 7/22/2009 67,010,402 68,200,000 0 .983 8 .7 

American Express Company ............ 1/9/2009 7/29/2009 340,000,000 391,200,000 0 .869 29 .5 

Bank of New York Mellon Corp ....... 10/28/2008 8/5/2009 136,000,000 155,700,000 0 .873 12 .3 

Morgan Stanley ............................... 10/28/2008 8/12/2009 950,000,000 1,039,800,000 0 .914 20 .2 

Northern Trust Corporation ............. 11/14/2008 8/26/2009 87,000,000 89,800,000 0 .969 14 .5 

Old Line Bancshares Inc. ............... 12/5/2008 9/2/2009 225,000 500,000 0 .450 10 .4 

Bancorp Rhode Island, Inc. ............ 12/19/2008 9/30/2009 1,400,000 1,400,000 1 .000 12 .6 

Centerstate Banks of Florida Inc. .. 11/21/2008 10/28/2009 212,000 220,000 0 .964 5 .9 

Manhattan Bancorp ........................ 12/5/2008 10/14/2009 63,364 140,000 0 .453 9 .8 

CVB Financial Corp ......................... 12/5/2008 10/28/2009 1,307,000 3,522,198 0 .371 6 .4 

Bank of the Ozarks ......................... 12/12/2008 11/24/2009 2,650,000 3,500,000 0 .757 9 .0 

Capital One Financial ..................... 11/14/2008 12/3/2009 148,731,030 232,000,000 0 .641 12 .0 

JPMorgan Chase & Co. ................... 10/28/2008 12/10/2009 950,318,243 1,006,587,697 0 .944 10 .9 

CIT Group Inc. ................................. 12/31/2008 – – 562,541 – (97 .2) 

TCF Financial Corp ......................... 1/16/2009 12/16/2009 9,599,964 11,825,830 0 .812 11 .0 

LSB Corporation .............................. 12/12/2008 12/16/2009 560,000 535,202 1 .046 9 .0 

Wainwright Bank & Trust Company 12/19/2008 12/16/2009 568,700 1,071,494 0 .531 7 .8 

Wesbanco Bank, Inc. ...................... 12/5/2008 12/23/2009 950,000 2,387,617 0 .398 6 .7 

Union First Market Bankshares Corporation (Union Bankshares Corporation) ..................................... 12/19/2008 12/23/2009 450,000 1,130,418 0 .398 5 .8 

Trustmark Corporation .................... 11/21/2008 12/30/2009 10,000,000 11,573,699 0 .864 9 .4 

Flushing Financial Corporation ....... 12/19/2008 12/30/2009 900,000 2,861,919 0 .314 6 .5 

OceanFirst Financial Corporation ... 1/16/2009 2/3/2010 430,797 279,359 1 .542 6 .2 

Monarch Financial Holdings, Inc. ... 12/19/2008 2/10/2010 260,000 623,434 0 .417 6 .7 

Bank of America ............................. 10/28/2008 351

1/9/2009 352

1/14/2009 353

3/3/2010 1,566,210,714 1,006,416,684 1 .533 6 .5 

Washington Federal Inc./Washington Federal Savings & Loan 

Association ................................. 11/14/2008 3/9/2010 15,623,222 10,166,404 1 .537 18 .6 

Signature Bank ............................... 12/12/2008 3/10/2010 11,320,751 11,458,577 0 .988 32 .4 

Texas Capital Bancshares, Inc. ...... 1/16/2009 3/11/2010 6,709,061 8,316,604 0 .807 30 .1 

Umpqua Holdings Corp. .................. 11/14/2008 3/31/2010 4,500,000 5,162,400 0 .872 6 .6 

City National Corporation ............... 11/21/2008 4/7/2010 18,500,000 24,376,448 0 .759 8 .5 

First Litchfield Financial Corporation ............................................. 12/12/2008 4/7/2010 1,488,046 1,863,158 0 .799 15 .9 

PNC Financial Services Group Inc. 12/31/2008 4/29/2010 324,195,686 346,800,388 0 .935 8 .7 

Comerica Inc. .................................. 11/14/2008 5/4/2010 183,673,472 276,426,071 0 .664 10 .8 

Valley National Bancorp ................. 11/14/2008 5/18/2010 5,571,592 5,955,884 0 .935 8 .3 

Wells Fargo Bank ............................ 10/28/2008 5/20/2010 849,014,998 1,064,247,725 0 .798 7 .8 

First Financial Bancorp .................. 12/23/2008 6/2/2010 3,116,284 3,051,431 1 .021 8 .2 

Sterling Bancshares, Inc./Sterling 

Bank ........................................... 12/12/2008 6/9/2010 3,007,891 5,287,665 0 .569 10 .8 


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FIGURE 28: WARRANT REPURCHASES/AUCTIONS FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY 

REPAID CPP FUNDS (AS OF NOVEMBER 4, 2010)—Continued 

Institution Investment Date 

Warrant 

Repurchase Date 

Warrant 

Repurchase/ 

Sale Amount 

Panel’s Best 

Valuation 

Estimate at 

Disposition Date 

Price/ 

Estimate 

Ratio 

IRR (Percent) 

SVB Financial Group ....................... 12/12/2008 6/16/2010 6,820,000 7,884,633 0 .865 7 .7 

Discover Financial Services ............ 3/13/2009 7/7/2010 172,000,000 166,182,652 1 .035 17 .1 

Bar Harbor Bancshares .................. 1/16/2009 7/28/2010 250,000 518,511 0 .482 6 .2 

Citizens & Northern Corporation ..... 1/16/2009 8/4/2010 400,000 468,164 0 .854 5 .9 

Columbia Banking System, Inc. ..... 11/21/2008 8/11/2010 3,301,647 3,291,329 1 .003 7 .3 

Hartford Financial Services Group, 

Inc. .............................................. 6/26/2009 9/21/2010 713,687,430 472,221,996 1 .511 30 .3 

Lincoln National Corporation .......... 7/10/2009 9/16/2010 216,620,887 181,431,183 1 .194 27 .1 

Fulton Financial Corporation .......... 12/23/2008 9/8/2010 10,800,000 15,616,013 0 .692 6 .7 

The Bancorp, Inc./The Bancorp 

Bank ........................................... 12/12/2008 9/8/2010 4,753,985 9,947,683 0 .478 12 .8 

South Financial Group, Inc./Carolina First Bank ........................... 12/5/2008 9/30/2010 400,000 1,164,486 0 .343 (34 .2) 

TIB Financial Corp/TIB Bank .......... 12/5/2008 9/30/2010 40,000 235,757 0 .170 (38 .0) 

Total ................................................ $8,148,332,166 $7,999,843,254 1 .019 8 .4 

351 Investment date for Bank of America in CPP. 352 Investment date for Merrill Lynch in CPP. 353 Investment date for Bank of America in TIP. 

FIGURE 29: VALUATION OF CURRENT HOLDINGS OF WARRANTS (AS OF NOVEMBER 4, 2010) 

[Dollars in millions] 

Financial Institutions with 

Warrants Outstanding 

Warrant Valuation 

Low 

Estimate 

High 

Estimate 

Best 

Estimate 

Citigroup, Inc.354 ........................................................................................ $71.57 $1,479.30 $206.88 

SunTrust Banks, Inc. .................................................................................. 17.34 356.98 123.78 

Regions Financial Corporation .................................................................... 5.94 172.60 63.27 

Fifth Third Bancorp ..................................................................................... 96.96 390.18 170.52 

KeyCorp ....................................................................................................... 20.90 158.08 64.62 

AIG ............................................................................................................... 419.89 2,062.45 909.42 

All Other Banks ........................................................................................... 379.97 1,210.32 812.63 

Total ............................................................................................................ $1,012.57 $5,829.91 $2,351.12 

354 Includes warrants issued under CPP, AGP, and TIP. 

2. Federal Financial Stability Efforts 

a. Federal Reserve and FDIC Programs 

In addition to the direct expenditures Treasury has undertaken 

through the TARP, the federal government has engaged in a much 

broader program directed at stabilizing the U.S. financial system. 

Many of these initiatives explicitly augment funds allocated by 

Treasury under specific TARP initiatives, such as FDIC and Federal Reserve asset guarantees for Citigroup, or operate in tandem 

with Treasury programs, such as the interaction between PPIP and 

TALF. Other programs, like the Federal Reserve’s extension of 

credit through its Section 13(3) facilities and special purpose vehicles (SPVs) and the FDIC’s Temporary Liquidity Guarantee Program (TLGP), operate independently of the TARP. 


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355 Congressional Oversight Panel, November Oversight Report: Guarantees and Contingent 

Payments in TARP and Related Programs, at 36 (Nov. 6, 2009) (online at cop.senate.gov/documents/cop-110609-report.pdf). 356 National Credit Union Administration, Corporate System Resolution: Corporate Credit 

Unions Frequently Asked Questions (FAQs), at 1 (online at www.ncua.gov/Resources/ 

CorporateCU/CSR/CSR-6.pdf). 357 National Credit Union Administration, Corporate System Resolution: National Credit 

Union Administration Virtual Town Hall, at 14 (Sept. 27, 2010) (online at www.ncua.gov/Resources/CorporateCU/CSR/10-0927WebinarSlides.pdf); National Credit Union Administration, 

Fact Sheet: Corporate Credit Union Conservatorships (Sept. 14, 2010) (online at www.ncua.gov/ 

Resources/CorporateCU/CSR/CSR-14.pdf). 

b. Total Financial Stability Resources 

Beginning in its April 2009 report, the Panel broadly classified 

the resources that the federal government has devoted to stabilizing the economy through myriad new programs and initiatives as 

outlays, loans, or guarantees. With the reductions in funding for 

certain TARP programs, the Panel calculates the total value of 

these resources to be over $2.5 trillion. However, this would translate into the ultimate ‘‘cost’’ of the stabilization effort only if: (1) assets do not appreciate; (2) no dividends are received, no warrants 

are exercised, and no TARP funds are repaid; (3) all loans default 

and are written off; and (4) all guarantees are exercised and subsequently written off. 

With respect to the FDIC and Federal Reserve programs, the 

risk of loss varies significantly across the programs considered 

here, as do the mechanisms providing protection for the taxpayer 

against such risk. As discussed in the Panel’s November 2009 report, the FDIC assesses a premium of up to 100 basis points on 

TLGP debt guarantees.355 In contrast, the Federal Reserve’s liquidity programs are generally available only to borrowers with good 

credit, and the loans are over-collateralized and with recourse to 

other assets of the borrower. If the assets securing a Federal Reserve loan realize a decline in value greater than the ‘‘haircut,’’ the 

Federal Reserve is able to demand more collateral from the borrower. Similarly, should a borrower default on a recourse loan, the 

Federal Reserve can turn to the borrower’s other assets to make 

the Federal Reserve whole. In this way, the risk to the taxpayer 

on recourse loans only materializes if the borrower enters bankruptcy. 

c. Credit Union Assistance 

Apart from the assistance credit unions have received through 

the CDCI, the National Credit Union Administration (NCUA), the 

federal agency charged with regulating federal credit unions 

(FCUs), has also made efforts to stabilize the corporate credit union 

(CCU) system. Corporate credit unions provide correspondent services, as well as liquidity and investment services to retail (or consumer) credit unions.356 Since March 2009, the NCUA has placed 

five CCUs into conservatorship due to their exposure to underperforming private-label MBS. The NCUA estimates that these five institutions, which have $72 billion in assets and provide services for 

4,600 retail credit unions, hold more than 90 percent of the MBS 

in the corporate credit union system.357

To assist in the NCUA’s stabilization efforts, the Temporary Corporate Credit Union Stabilization Fund (‘‘Stabilization Fund’’) was 

created to help cover costs associated with CCU conservatorships 


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358 National Credit Union Administration, Board Action Memorandum (June 15, 2010) (online 

at www.ncua.gov/GenInfo/BoardandAction/DraftBoardActions/2010/Jun/ 

Item6aBAMSFAssessmentJune2010(1%20billion)FINAL.pdf). 359 National Credit Union Administration, Remarks as Prepared for Delivery by Board Member 

Gigi Hyland at Grand Hyatt Washington (Sept. 20, 2010) (online at www.ncua.gov/GenInfo/ 

Members/Hyland/Speeches/10-0920HylandNAFCUCongrCaucus.pdf). 360 U.S. Department of the Treasury, FY2011 Budget in Brief, at 138 (Feb. 2010) (online at 

www.treas.gov/offices/management/budget/budgetinbrief/fy2011/FY%202011%20BIB%20(2).pdf). 361 U.S. Department of the Treasury, MBS Purchase Program: Portfolio by Month (online at 

www.financialstability.gov/docs/October%202010%20Portfolio%20by%20month.pdf) (accessed 

Nov. 12, 2010). Treasury has received $65.7 billion in principal repayments and $14.3 billion 

in interest payments from these securities. See U.S. Department of the Treasury, MBS Purchase 

Program Principal and Interest Received (online at www.financialstability.gov/docs/ 

October%202010%20MBS%20Principal%20and%20Interest%20Monthly%20Breakout.pdf) 

(accessed Nov. 12, 2010). 362Federal Reserve Report on Credit and Liquidity Programs and the Balance Sheet, supra 

note 251, at 5. 363Federal Reserve Report on Credit and Liquidity Programs and the Balance Sheet, supra 

note 251, at 5. 364Federal Reserve Statistical Release H.4.1, supra note 251. 365 Board of Governors of the Federal Reserve System, Press Release—FOMC Statement (Nov. 

3, 2010) (online at www.federalreserve.gov/newsevents/press/monetary/20101103a.htm); Federal 

Reserve Bank of New York, Statement Regarding Purchases of Treasury Securities (Nov. 3, 2010) 

(online at www.federalreserve.gov/newsevents/press/monetary/monetary20101103a1.pdf). 366On August 10, 2010, the Federal Reserve began reinvesting principal payments on agency 

debt and agency MBS holdings in longer-term Treasury securities in order to keep the amount 

of their securities holdings in their System Open Market Account portfolio at their then-current 

level. Board of Governors of the Federal Reserve System, FOMC Statement (Aug. 10, 2010) (online at www.federalreserve.gov/newsevents/press/monetary/20100810a.htm). 

and liquidations. The Stabilization Fund was established on May 

20, 2009, as part of the Helping Families Save Their Homes Act 

of 2009, and allows the NCUA to borrow up to $6 billion from 

Treasury on a revolving basis.358 The NCUA had drawn a total of 

$1.5 billion from the Stabilization Fund, and repaid the balance at 

the end of September.359

d. Mortgage Purchase Programs 

On September 7, 2008, Treasury announced the GSE Mortgage 

Backed Securities Purchase Program. The Housing and Economic 

Recovery Act of 2008 provided Treasury with the authority to purchase MBS guaranteed by GSEs through December 31, 2009. 

Treasury purchased approximately $225 billion in GSE MBS by the 

time its authority expired.360 As of October 2010, there was ap- proximately $154.6 billion in MBS still outstanding under this program.361

In March 2009, the Federal Reserve authorized purchases of $1.25 trillion MBS guaranteed by Fannie Mae, Freddie Mac, and 

Ginnie Mae, and $200 billion of agency debt securities from Fannie 

Mae, Freddie Mac, and the Federal Home Loan Banks.362 The intended purchase amount for agency debt securities was subsequently decreased to $175 billion.363 All purchasing activity was 

completed on March 31, 2010. As of November 10, the Federal Reserve held $1.05 trillion of agency MBS and $150 billion of agency 

debt.364

e. Federal Reserve Treasury Securities Purchases 365

On November 3, 2010, the Federal Open Market Committee 

(FOMC) announced that it has directed FRBNY to begin purchasing an additional $600 billion in longer-term Treasury securities. In addition, FRBNY will reinvest $250 billion to $350 billion 

in principal payments from agency debt and agency MBS in Treasury securities.366 The additional purchases and reinvestments will 


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367Federal Reserve Bank of New York, FAQs: Purchases of Longer-term Treasury Securities 

(Nov. 3, 2010) (online at www.newyorkfed.org/markets/lttreas_faq.html). 368Federal Reserve Statistical Release H.4.1, supra note 251. 

be conducted through the end of the second quarter 2011, meaning 

the pace of purchases will be approximately $110 billion per month. 

In order to facilitate these purchases, FRBNY will temporarily lift 

its System Open Market Account per-issue limit, which prohibits 

the Federal Reserve’s holdings of an individual security from surpassing 35 percent of the outstanding amount.367 As of November 

10, 2010, the Federal Reserve held $853 billion in Treasury securities.368

FIGURE 30: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF OCTOBER 27, 

2010) xxxiii

[Dollars in billions] 

Program Treasury 

(TARP) 

Federal 

Reserve FDIC Total 

Total ............................................................................... $475 $1,378.0 $690.9 $2,544.0 

Outlays xxxiv .......................................................... 232.2 1,226.8 188.9 1,648.0 

Loans ..................................................................... 23.4 151.2 0 174.6 

Guarantees xxxv .................................................... 4.3 0 502 506.3 

Repaid and Unavailable TARP Funds ................... 215.1 0 0 215.1 

AIG xxxvi ......................................................................... 69.8 83.1 0 152.9 

Outlays .................................................................. xxxvii 69.8 xxxviii 26.1 0 95.9 

Loans ..................................................................... 0 xxxix 57.1 0 57.1 

Guarantees ............................................................ 0 0 0 0 

Citigroup ........................................................................ 11.6 0 0 11.6 

Outlays .................................................................. xl 11.6 0 0 11.6 

Loans ..................................................................... 0 0 0 0 

Guarantees ............................................................ 0 0 0 0 

Capital Purchase Program (Other) .............................. 37.8 0 0 37.8 

Outlays .................................................................. xli 37.8 0 0 37.8 

Loans ..................................................................... 0 0 0 0 

Guarantees ............................................................ 0 0 0 0 

Capital Assistance Program ......................................... N/A 0 0 xlii N/A 

TALF ................................................................................ 4.3 38.7 0 43.0 

Outlays .................................................................. 0 0 0 0 

Loans ..................................................................... 0 xliv 38.7 0 38.7 

Guarantees ............................................................ xliii 4.3 0 0 4.3 

PPIP (Loans) xlv ............................................................ 0 0 0 0 

Outlays .................................................................. 0 0 0 0 

Loans ..................................................................... 0 0 0 0 

Guarantees ............................................................ 0 0 0 0 

PPIP (Securities) ........................................................... xlvi 22.4 0 0 22.4 

Outlays .................................................................. 7.5 0 0 7.5 

Loans ..................................................................... 14.9 0 0 14.9 

Guarantees ............................................................ 0 0 0 0 

Making Home Affordable Program/Foreclosure Mitigation ........................................................................ 45.6 0 0 45.6 

Outlays .................................................................. xlvii 45.6 0 0 45.6 

Loans ..................................................................... 0 0 0 0 

Guarantees ............................................................ 0 0 0 0 

Automotive Industry Financing Program ..................... xlviii 67.1 0 0 67.1 

Outlays .................................................................. 59.0 0 0 59.0 

Loans ..................................................................... 8.1 0 0 8.1 

Guarantees ............................................................ 0 0 0 0 

Automotive Supplier Support Program ........................ 0.4 0 0 0.4 

Outlays .................................................................. 0 0 0 0 

Loans ..................................................................... xlix 0.4 0 0 0.4 

Guarantees ............................................................ 0 0 0 0 

SBA 7(a) Securities Purchase ...................................... 0.36 0 0 0.36 

Outlays .................................................................. 0.36 0 0 0.36 

Loans ..................................................................... 0 0 0 0 


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FIGURE 30: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF OCTOBER 27, 

2010) xxxiii—Continued 

[Dollars in billions] 

Program Treasury 

(TARP) 

Federal 

Reserve FDIC Total 

Guarantees ............................................................ 0 0 0 0 

Community Development Capital Initiative ................. li 0.57 0 0 0.57 

Outlays .................................................................. 0 0 0 0 

Loans ..................................................................... 0.57 0 0 0.57 

Guarantees ............................................................ 0 0 0 0 

Temporary Liquidity Guarantee Program .................... 0 0 502.0 502.0 

Outlays .................................................................. 0 0 0 0 

Loans ..................................................................... 0 0 0 0 

Guarantees ............................................................ 0 0 lii 502.0 502.0 

Deposit Insurance Fund ............................................... 0 0 188.9 188.9 

Outlays .................................................................. 0 0 liii 188.9 188.9 

Loans ..................................................................... 0 0 0 0 

Guarantees ............................................................ 0 0 0 0 

Other Federal Reserve Credit Expansion .................... 0 1,256.1 0 1,256.1 

Outlays .................................................................. 0 liv 1,200.7 0 1,200.7 

Loans ..................................................................... 0 lv 55.4 0 55.4 

Guarantees ............................................................ 0 0 0 0 

xxxiii Unless otherwise noted, all data in this figure are as of October 27, 2010. xxxiv The term ‘‘outlays’’ is used here to describe the use of Treasury funds under the TARP, which are broadly classifiable as purchases of 

debt or equity securities (e.g., debentures, preferred stock, exercised warrants, etc.). These values were calculated using (1) Treasury’s actual 

reported expenditures, and (2) Treasury’s anticipated funding levels as estimated by a variety of sources, including Treasury statements and 

GAO estimates. Anticipated funding levels are set at Treasury’s discretion, have changed from initial announcements, and are subject to further change. Outlays used here represent investment and asset purchases—as well as commitments to make investments and asset 

purchases—and are not the same as budget outlays, which under section 123 of EESA are recorded on a ‘‘credit reform’’ basis. xxxv Although many of the guarantees may never be exercised or will be exercised only partially, the guarantee figures included here rep- resent the federal government’s greatest possible financial exposure. xxxvi U.S. Department of the Treasury, Treasury Update on AIG Investment Valuation (Nov. 1, 2010) (online at 

financialstability.gov/latest/prl11012010.html). AIG values exclude accrued dividends on preferred interests in the AIA and ALICO SPVs and 

accrued interest payable to FRBNY on the Maiden Lane LLCs. xxxviiThis number includes investments under the AIGIP/SSFI Program: a $40 billion investment made on November 25, 2008, and a $30 

billion investment made on April 17, 2009 (less a reduction of $165 million representing bonuses paid to AIG Financial Products employees). 

As of November 1, 2010, AIG had utilized $47.5 billion of the available $69.8 billion under the AIGIP/SSFI. U.S. Department of the Treasury, 

Treasury Update on AIG Investment Valuation (Nov. 1, 2010) (online at www.financialstability.gov/latest/prl11012010.html); U.S. Department 

of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 13 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). xxxviii As part of the restructuring of the U.S. government’s investment in AIG announced on March 2, 2009, the amount available to AIG

through the Revolving Credit Facility was reduced by $25 billion in exchange for preferred equity interests in two special purpose vehicles, AIA 

Aurora LLC and ALICO Holdings LLC. These SPVs were established to hold the common stock of two AIG subsidiaries: American International 

Assurance Company Ltd. (AIA) and American Life Insurance Company (ALICO). As of October 27, 2010, the book value of the Federal Reserve 

Bank of New York’s holdings in AIA Aurora LLC and ALICO Holdings LLC was $26.1 billion in preferred equity ($16.7 billion in AIA and $9.4 

billion in ALICO). Federal Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1) (Oct. 28, 2010) (online at 

www.federalreserve.gov/releases/h41/20101028/). xxxix This number represents the full $29.3 billion made available to AIG through its Revolving Credit Facility (RCF) with FRBNY ($18.9 billion had been drawn down as of October 27, 2010) and the outstanding principal of the loans extended to the Maiden Lane II and III SPVs to 

buy AIG assets (as of October 27, 2010, $13.5 billion and $14.3 billion, respectively). The amounts outstanding under the Maiden Lane II and 

III facilities do not reflect the accrued interest payable to FRBNY. Income from the purchased assets is used to pay down the loans to the 

SPVs, reducing the taxpayers’ exposure to losses over time. Federal Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1) 

(Oct. 27, 2010) (online at www.federalreserve.gov/releases/h41/20101028/). 

The maximum amount available through the RCF decreased from $34.4 billion to $29.3 billion between March and September 2010, as a 

result of the sale of two AIG subsidiaries, as well as the company’s sale of CME Group, Inc. common stock. The reduced ceiling also reflects 

a $3.95 billion repayment to the RCF from proceeds earned from a debt offering by the International Lease Finance Corporation (ILFC), an AIG 

subsidiary. Board of Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and 

the Balance Sheet, at 18 (Oct. 2010) (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport201010.pdf). xlThis figure represents Treasury’s $25 billion investment in Citigroup, minus $13.4 billion applied as a repayment for CPP funding. The 

amount repaid comes from the $16.4 billion in gross proceeds Treasury received from the sale of 4.1 billion Citigroup common shares. See 

note ii, supra for further details of the sales of Citigroup common stock to date. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 13 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). xliThis figure represents the $204.9 billion Treasury disbursed under the CPP, minus the $25 billion investment in Citigroup identified above, $139.5 billion in repayments (excluding the amount repaid for the Citigroup investment) that are in ‘‘repaid and unavailable’’ TARP funds, and losses under the program. This figure does not account for future repayments of CPP investments and dividend payments from 

CPP investments. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, 

at 13 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). xlii On November 9, 2009, Treasury announced the closing of the CAP and that only one institution, GMAC, was in need of further capital 

from Treasury. GMAC, however, received further funding through the AIFP. Therefore, the Panel considers CAP unused. U.S. Department of the 

Treasury, Treasury Announcement Regarding the Capital Assistance Program (Nov. 9, 2009) (online at 

www.financialstability.gov/latest/tgl11092009.html). 


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xliiiThis figure represents the $4.3 billion adjusted allocation to the TALF SPV. However, as of October 27, 2010, TALF LLC had drawn only 

$105 million of the available $4.3 billion. Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (Sept. 

30, 2010) (online at www.federalreserve.gov/releases/h41/20100930/); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 21 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). On June 30, 2010, the Federal 

Reserve ceased issuing loans collateralized by newly issued CMBS. As of this date, investors had requested a total of $73.3 billion in TALF 

loans ($13.2 billion in CMBS and $60.1 billion in non-CMBS) and $71 billion in TALF loans had been settled ($12 billion in CMBS and $59 

billion in non-CMBS). Earlier, it ended its issues of loans collateralized by other TALF-eligible newly issued and legacy ABS (non-CMBS) on 

March 31, 2010. Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Terms and Conditions (online at 

www.newyorkfed.org/markets/talflterms.html) (accessed Nov. 12, 2010); Federal Reserve Bank of New York, Term Asset-Backed Securities 

Loan Facility: CMBS (online at www.newyorkfed.org/markets/cmbsloperations.html) (accessed Nov. 12, 2010); Federal Reserve Bank of New 

York, Term Asset-Backed Securities Loan Facility: CMBS (online at www.newyorkfed.org/markets/CMBSlrecentloperations.html) (accessed Nov. 

12, 2010); Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: non-CMBS (online at 

www.newyorkfed.org/markets/talfloperations.html) (accessed Nov. 12, 2010); Federal Reserve Bank of New York, Term Asset-Backed Securities 

Loan Facility: non-CMBS (online at www.newyorkfed.org/markets/TALFlrecentloperations.html) (accessed Nov. 12, 2010). xliv This number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value of Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan, at 4 (Feb.10, 2009) (online at 

www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20 billion Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion to a $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Since only $43 

billion in TALF loans remained outstanding when the program closed, Treasury is currently responsible for reimbursing the Federal Reserve Board only up to $4.3 billion in losses from these loans. Thus, the Federal Reserve’s maximum potential exposure under the TALF is $38.7 billion. See Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (Oct. 28, 2010) (online at 

www.federalreserve.gov/releases/h41/20101028/). xlv It is unlikely that resources will be expended under the PPIP Legacy Loans Program in its original design as a joint Treasury-FDIC program to purchase troubled assets from solvent banks. In several sales described in FDIC press releases, it appears that there is no Treasury 

participation, and FDIC activity is accounted for here as a component of the FDIC’s Deposit Insurance Fund outlays. See, e.g., Federal Deposit 

Insurance Corporation, FDIC Statement on the Status of the Legacy Loans Program (June 3, 2009) (online at 

www.fdic.gov/news/news/press/2009/pr09084.html). xlviThis figure represents Treasury’s final adjusted investment amount in the Legacy Securities Public-Private Investment Program (PPIP). 

As of October 29, 2010, Treasury reported commitments of $14.9 billion in loans and $7.5 billion in membership interest associated with 

PPIP. On January 4, 2010, Treasury and one of the nine fund managers, UST/TCW Senior Mortgage Securities Fund, L.P. (TCW), entered into a 

‘‘Winding-Up and Liquidation Agreement.’’ Treasury’s final investment amount in TCW totaled $356 million. Following the liquidation of the 

fund, Treasury’s initial $3.3 billion obligation to TCW was reallocated among the eight remaining funds on March 22, 2010. See U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 23 (Nov. 2, 2010) (online 

at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). 

On October 20, 2010, Treasury released its fourth quarterly report on PPIP. The report indicates that as of September 30, 2010, all eight 

investment funds have realized an internal rate of return since inception (net of any management fees or expenses owed to Treasury) above 

19 percent. The highest performing fund, thus far, is AG GECC PPIF Master Fund, L.P., which has a net internal rate of return of 52 percent. 

U.S. Department of the Treasury, Legacy Securities Public-Private Investment Program, at 7 (Oct. 20, 2010) (online at 

financialstability.gov/docs/External%20Report%20-%2009-10%20vFinal.pdf). xlvii As of October 29, 2010, the total cap for HAMP was $29.9 billion. The total amount of TARP funds committed to HAMP is $29.9 billion. However, as of October 30, 2010, only $597.2 million in non-GSE payments has been disbursed under HAMP. U.S. Department of the 

Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 43 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf); U.S. Department of the Treasury, Troubled Assets Relief Program Monthly 105(a) Report—September 2010, at 6 (Oct. 1, 2010) (online at 

financialstability.gov/docs/105CongressionalReports/September%20105(a)%20reportlFINAL.pdf). Data provided by Treasury staff (Nov. 10, 

2010). xlviii A substantial portion of the total $81.3 billion in loans extended under the AIFP has since been converted to common equity and preferred shares in restructured companies. $8.1 billion has been retained as first lien debt (with $1 billion committed to old GM and $7.1 billion to Chrysler). This figure ($67.1 billion) represents Treasury’s current obligation under the AIFP after repayments and losses. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 18 (Nov. 2, 2010) (online 

at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). xlix This figure represents Treasury’s total adjusted investment amount in the ASSP. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 19 (Nov. 2, 2010) (online at 

financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). l U.S. Department of the Treasury, Troubled Asset Relief Program: Two Year Retrospective, at 43 (Oct. 2010) (online at 

www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospectivel10%2005%2010ltransmittal%20letter.pdf). li U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending October 29, 2010, at 17 (Nov. 

2, 2010) (online at financialstability.gov/docs/transaction-reports/11-2-10%20Transactions%20Report%20as%20of%2010-29-10.pdf). liiThis figure represents the current maximum aggregate debt guarantees that could be made under the program, which is a function of the number and size of individual financial institutions participating. $286.8 billion of debt subject to the guarantee is currently outstanding, 

which represents approximately 57.1 percent of the current cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance 

Under the Temporary Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (Sept. 30, 2010) (online at 

www.fdic.gov/regulations/resources/tlgp/totallissuance09-10.html). The FDIC has collected $10.4 billion in fees and surcharges from this program since its inception in the fourth quarter of 2008. Federal Deposit Insurance Corporation, Monthly Reports Related to the Temporary Liquidity Guarantee Program: Fees Under Temporary Liquidity Guarantee Debt Program (Sept. 30, 2010) (online at 

www.fdic.gov/regulations/resources/tlgp/fees.html). liiiThis figure represents the FDIC’s provision for losses to its deposit insurance fund attributable to bank failures in the third and fourth 

quarters of 2008, the first, second, third, and fourth quarters of 2009, and the first and second quarters of 2010. Federal Deposit Insurance 

Corporation, Chief Financial Officer’s (CFO) Report to the Board: DIF Income Statement—Second Quarter 2010 (online at 

www.fdic.gov/about/strategic/corporate/cfolreportl2ndqtrl10/income.html). For earlier reports, see Federal Deposit Insurance Corporation, 

Chief Financial Officer’s (CFO) Report to the Board (online at www.fdic.gov/about/strategic/corporate/index.html) (accessed Nov. 12, 2010). This 

figure includes the FDIC’s estimates of its future losses under loss-sharing agreements that it has entered into with banks acquiring assets 

of insolvent banks during these eight quarters. Under a loss-sharing agreement, as a condition of an acquiring bank’s agreement to purchase 

the assets of an insolvent bank, the FDIC typically agrees to cover 80 percent of an acquiring bank’s future losses on an initial portion of 

these assets and 95 percent of losses on another portion of assets. See, e.g., Federal Deposit Insurance Corporation, Purchase and Assumption Agreement—Whole Bank, All Deposits—Among FDIC, Receiver of Guaranty Bank, Austin, Texas, Federal Deposit Insurance Corporation and 

Compass Bank, at 65–66 (Aug. 21, 2009) (online at www.fdic.gov/bank/individual/failed/guaranty-txlplandlalwladdendum.pdf). liv Outlays are comprised of the Federal Reserve Mortgage Related Facilities. The Federal Reserve balance sheet accounts for these facilities under Federal agency debt securities and mortgage-backed securities held by the Federal Reserve. Board of Governors of the Federal Reserve 

System, Factors Affecting Reserve Balances (H.4.1) (Oct. 27, 2010) (online at www.federalreserve.gov/releases/h41/20100930/). Although the 

Federal Reserve does not employ the outlays, loans, and guarantees classification, its accounting clearly separates its mortgage-related purchasing programs from its liquidity programs. See, e.g., Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances 

(H.4.1), at 2 (Oct. 28, 2010) (online at www.federalreserve.gov/releases/h41/20101028) (accessed Nov. 3, 2010). lv Federal Reserve Liquidity Facilities classified in this table as loans include primary credit, secondary credit, central bank liquidity swaps, 

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, loans outstanding to Commercial Paper Funding Facility LLC, 

seasonal credit, term auction credit, the Term Asset-Backed Securities Loan Facility, and loans outstanding to Bear Stearns (Maiden Lane 

LLC). Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (Oct. 28, 2010) (online at 

www.federalreserve.gov/releases/h41/20101028/) (accessed Nov. 3, 2010). 


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SECTION FOUR: OVERSIGHT ACTIVITIES 

The Congressional Oversight Panel was established as part of 

the Emergency Economic Stabilization Act (EESA) and formed on 

November 26, 2008. Since then, the Panel has produced 24 oversight reports, as well as a special report on regulatory reform, 

issued on January 29, 2009, and a special report on farm credit, 

issued on July 21, 2009. Since the release of the Panel’s October 

oversight report, the following developments pertaining to the Panel’s oversight of the TARP took place: 

• The Panel held a hearing in Washington on October 21, 2010, 

discussing restrictions on executive compensation for companies that received TARP funds. The Panel heard testimony 

from Kenneth R. Feinberg, the former Special Master for 

TARP Executive Compensation, as well as from industry and 

academic experts. 

• The Panel held a hearing in Washington on October 27, 2010. 

The Panel heard testimony from Phyllis Caldwell, chief of 

Treasury’s Homeownership Preservation Office, as well as from 

industry and academic experts about Treasury’s HAMP program and the effects of recent foreclosure documentation irregularities on Treasury’s ability to maintain systemic financial 

stability and effective foreclosure mitigation efforts under the 

TARP. 

Upcoming Reports and Hearings 

The Panel will release its next oversight report in December. The 

report will discuss HAMP, the most expansive of Treasury’s foreclosure mitigation initiatives under the TARP, assessing its effectiveness in meeting the TARP’s legislative mandate to ‘‘protect 

home values’’ and ‘‘preserve homeownership.’’ This will be the Panel’s fourth report addressing Treasury’s foreclosure mitigation efforts under the TARP. 

Acknowledgements 

The Panel would like to thank the following individuals for sharing their thoughts and suggestions: Roger Ashworth, MBS Analyst, 

Amherst Securities; Guy Cecala, CEO and Publisher, Inside Mortgage Finance; Chris Gamaitoni, Vice President, Compass Point Research & Trading; Jason Gold, Senior Fellow for Housing and Financial Services Policy, Third Way; Laurie Goodman, Senior Managing Director, Amherst Securities; Anne Kim, Domestic Policy 

Program Director, Third Way; Paul Miller, Managing Director and 

Group Head of Financial Services Research, FBR Capital Markets; 

Matthew O’Connor, Research Analyst, Deutsche Bank Securities; 

Christopher Peterson, Associate Dean for Academic Affairs and 

Professor of Law, University of Utah; Robert Placet, Associate Analyst, Deutsche Bank Securities; Joshua Rosner, Managing Director, 

Graham Fisher & Co.; and, Jason Stewart, Managing Director, 

Compass Point Research & Trading. 

The Panel also wishes to acknowledge and thank the many individuals from the academic, legal, consumer, analyst, and other 

communities who provided useful information and views for this report. 


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SECTION FIVE: ABOUT THE CONGRESSIONAL 

OVERSIGHT PANEL 

In response to the escalating financial crisis, on October 3, 2008, 

Congress provided Treasury with the authority to spend $700 billion to stabilize the U.S. economy, preserve home ownership, and 

promote economic growth. Congress created the Office of Financial 

Stability (OFS) within Treasury to implement the TARP. At the 

same time, Congress created the Congressional Oversight Panel to 

‘‘review the current state of financial markets and the regulatory 

system.’’ The Panel is empowered to hold hearings, review official 

data, and write reports on actions taken by Treasury and financial 

institutions and their effect on the economy. Through regular reports, the Panel must oversee Treasury’s actions, assess the impact 

of spending to stabilize the economy, evaluate market transparency, ensure effective foreclosure mitigation efforts, and guarantee that Treasury’s actions are in the best interests of the American people. In addition, Congress instructed the Panel to produce 

a special report on regulatory reform that analyzes ‘‘the current 

state of the regulatory system and its effectiveness at overseeing 

the participants in the financial system and protecting consumers.’’ 

The Panel issued this report in January 2009. Congress subsequently expanded the Panel’s mandate by directing it to produce a 

special report on the availability of credit in the agricultural sector. 

The report was issued on July 21, 2009. 

On November 14, 2008, Senate Majority Leader Harry Reid and 

the Speaker of the House Nancy Pelosi appointed Richard H. 

Neiman, Superintendent of Banks for the State of New York, 

Damon Silvers, Director of Policy and Special Counsel of the American Federation of Labor and Congress of Industrial Organizations 

(AFL–CIO), and Elizabeth Warren, Leo Gottlieb Professor of Law 

at Harvard Law School, to the Panel. With the appointment on November 19, 2008, of Congressman Jeb Hensarling to the Panel by 

House Minority Leader John Boehner, the Panel had a quorum and 

met for the first time on November 26, 2008, electing Professor 

Warren as its chair. On December 16, 2008, Senate Minority Leader Mitch McConnell named Senator John E. Sununu to the Panel. 

Effective August 10, 2009, Senator Sununu resigned from the 

Panel, and on August 20, 2009, Senator McConnell announced the 

appointment of Paul Atkins, former Commissioner of the U.S. Securities and Exchange Commission, to fill the vacant seat. Effective 

December 9, 2009, Congressman Jeb Hensarling resigned from the 

Panel and House Minority Leader John Boehner announced the appointment of J. Mark McWatters to fill the vacant seat. Senate Minority Leader Mitch McConnell appointed Kenneth Troske, Sturgill 

Professor of Economics at the University of Kentucky, to fill the vacancy created by the resignation of Paul Atkins on May 21, 2010. 

Effective September 17, 2010, Elizabeth Warren resigned from the 

Panel, and on September 30, 2010, Senate Majority Leader Harry 

Reid announced the appointment of Senator Ted Kaufman to fill 

the vacant seat. On October 4, 2010, the Panel elected Senator 

Kaufman as its chair. 


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APPENDIX I: LETTER FROM CHAIRMAN TED KAUFMAN 

TO SPECIAL MASTER PATRICIA GEOGHEGAN, RE: FOLLOW UP TO EXECUTIVE COMPENSATION HEARING, 

DATED NOVEMBER 1, 2010 


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